Credit, Bad News, and Consumer Fears

No matter what the industry, the economic woes of that industry can be blamed on three things: (1) the current credit situation in this country; (2) the constant bad news about jobs and the economy; and, (3) and consumer fears over that bad news.

If you look at the auto industry, for example, people aren't buying cars because they either can't get credit or, because of all the bad economic news and the possible impact on their own economic situation, they are afraid to commit to the purchase of a big-ticket item like a new car. Even, more so, housing is in the same situation. However, the impact on the housing market is made worse by the continually falling home prices.

As I have said before, more than anything, a recession ,or even a depression, is 99 percent based on the psychological impact of consumer fears about the economy.

Right now, people and banks are cautiously guarding their cash. It is a justified reaction to the housing credit meltdown. The banks don't want to lend unless they are assured of the best credit conditions. After all, they don't want to get burned, again, by holding any more bad loans. At the same time, people don't want to over-commit on spending because of the uncertainty of our times. That means that spending has come down to essentials and hardly any money is be spent on the non-essentials; ie. that Cafe Latte every morning.

The consumer has assumed this fetal position because the news is consistently bad. Day after day, massive job cuts are being announced. The auto companies are talking about folding their tents and the possibility that 3 million more Americans might be out of work. Each month, existing home prices continue to fall. Foreclosures continue at record rates. The unemployment numbers are bad. And, almost every day, you have either Barack Obama or George Bush, Henry Paulson, or Ben Bernanke, or various members of Congress coming before the microphones in order to announce another program to fix the economy. This is just unsettling to the people of this country. That's why spending is down and that's why spending will continue to drop.

In order for this economy to get back to good health. The bad news and the psychological impact of that news has to stop. The announcement of layoffs, foreclosures, and increasing unemployment has to either level off or come to an end. The continuous declarations by our politicians have to come to an end. That only reassures the buying public that things are bad. Only when the noise stops about the economy will the consumer start spending again and effectively get this economy going again. All these government spending programs don't mean anything if the news continues to scare the consumer. There is a natural process of economic contraction that has to take place. The excesses of the last 20 or 30 years has to be shaken off. Only until those excesses are completely shed will things look better.

For example, spending billions on the auto companies will just keep them in business for a while. However, the real problem, the consumer not buying those cars, is going to be out there for quite a bit longer. To me, our politicians have this all backwards. They want the economy to adjust to the failing car companies. However, the reality is just the reverse. The auto companies are going to have to adjust to the failing economy. That means jobs, expenses, and product lines will have to be adjusted downward to meet the current economic conditions. People are not going to rush out and buy a $26,000, around-town only electric car that will need a multi-thousand dollar battery replacement in just a few years. The future of our auto industry is not in those electric cars. For that matter, the same is true with the hybrids. This isn't a consumer-driven move by the auto companies to sell more cars. Instead, it is being driven by our own politicians and their newly passed fuel efficiency laws (CAFE standards); which, in light of falling oil prices, seems less important, today, than keeping our auto workers working.

Having a sounds-good political commitment to creating 2.5 million jobs over the next four years on infrastructure "ain't hardly gonna do it" when nearly 2 million more people than normal are losing their jobs every year. Do the math. The Bush Administration and our Federal Reserve Banking system are correct in focusing on credit. Available credit will ultimately help get the consumer and businesses spending again. However, only after the economy adjusts to a new leaner lifestyle will the journey through this recession come to an end. Just mark my words.