Most Popular ArticlesNovember 24, 2009
Demographics are working against increases in consumer spending. Shilling said that the largest segment of the population – the postwar baby boom generation – are nearing retirement and will be more frugal, while those in their 20s, who are more likely to spend, make up a smaller part of the population.
Money saved by consumers has gone to pay off mortgages and consumer loans. He said consumers are also saving on housing; new construction has been slow, yet vacancy rates are rising, indicating that many people are moving in with their parents or seeking other ways to avoid or delay housing purchases.
Unemployment numbers are misleading
“The reported statistics on unemployment, which just reached 10.2%, do not tell the whole story,” Shilling said.
For the first time since the 1930s, two factors – voluntary furloughs and wage cuts – are exacerbating the unemployment crisis. Deflation over the last six months has forced companies to use those two measures to cut costs.
The mean duration of unemployment increased from 16 to 26 weeks during this recession, he said, further depressing consumer demand.
Meanwhile, Shilling said, corporate profits have been strong over the last decade. “Corporations have done very well by not hiring” and have benefited from tremendous increases in productivity, he said.
But that era of strong corporate performance has ended, Shilling said – it died along with the US consumer.
Expect another stimulus package
Of the recent $787 billion stimulus package, Shilling said, “only $200 billion went to rock-hard stimulus spending” like infrastructure and unemployment. “The rest was for the administration’s social agenda.” He cautioned to prepare for another stimulus package focused on job creation.
“We know that tax cuts don’t work,” he said. “Maybe job creation and infrastructure will.”
Such a stimulus might break the cycle of unemployment and depressed consumer demand and “get us out of the recession – maybe by the middle of next year.”
Shilling is not convinced the current recession is over. He noted that in eight of the 11 postwar recessions there was at least one quarter of positive GDP growth, as was reported in the third quarter of this year.
Shilling’s version of the New Normal: Slow growth and deflation
Two factors – consumer retrenchment and inflated housing inventories – will contribute to delaying economic recovery, which will begin slowly in mid-2010, according to Shilling.
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