Tuesday, September 6, 2011

Five Reasons Why Our Economy Won't Recover Any Time Soon

As I have stated before, our economy is 70% driven by consumer spending; and, if in any way, the consumer is forced to spend less of their income on discretionary items, the economy will suffer. To that, I present five reasons why I think the consumer is significantly absent from our economy and why our economy will continue to falter.

1. Unabated Declines in Home Values and a Resulting Higher Savings Rate. Prior to the recession, most Americans saw the rapidly increasing value of their homes as a measure of their wealth. As a consequence, people were only saving about 2% of their income towards retirement. But, when home values collapsed, Americans started to save an increasing amount of their money. Today, the savings rate has nearly trebled from that 2007 rate of 2%. This means that 4% of the average consumer's paycheck is no longer being spent on all those "extra" spending items that would normally help drive the economy.

2. A Continually Weakened Dollar and the Resulting Inflation. Over the last 2-1/2 years, Obama and the Federal Reserve have spent trillions of dollars in money we just don't have. All of it having to be borrowed. As a consequence, the dollar's value has dropped significantly. But, when the dollar is devalued like that, the price we pay for imported goods rises sharply. As a country, we are heavily dependent on imported products in our daily lives. For example, when Obama took office, oil was at $36.15. Just before the so-called Arab Spring, oil had already risen to just above $89 a barrel. Then came the Arab Spring and it jumped to $120 a barrel. Contrary to stimulating the economy, all that government spending is actually depressing the economy by forcing the average consumer to spend an increasing amount of their paycheck to cover inflated prices; leaving less to spend on those discretionary items that would help our economy grow. Many low income consumers are being forced to forgo the luxuries of things we consider essentials; like new clothes. Many Americans have had to cut back on a lot of previous expenditures. For example, recent satellite and cable company reports show the consumer is leaving these services. Something that had never before happened.
However, inflation doesn't just end with import prices. Domestic prices also rise when the dollar is devalued. First, any increases in oil prices affects food and transportation prices because both those areas are so energy intensive. Also, when the dollar is devalued, our domestically produced goods become cheaper to sell on an export basis. This, then, creates a higher demand for U.S. produced products. With this higher foreign demand, we then find ourselves competing worldwide for many of our own, home-grown products. The result is simple: Increased demand means higher prices. Once again, the consumer finds more and more of their paycheck going to higher prices.

3. Regressive Increases in State and Local Taxes and Fees. While the Federal Government may not have increased taxes since the recession started, state and local governments have been busily hiking taxes and fees in their effort to fight off massive deficits. But, in doing so, they have been crippling the consumer by, once again, diverting money away from the economy. In Illinois, alone, the state income tax was upped by 67%. But, the increasing of taxes, especially in a weak economy, only makes the economy weaker. Instead of raising tax revenues, the result is the opposite effect with the consumer becoming less active.

4. Oppressive Government Regulation. The Obama Administration has certainly been the most prolific regulator in U.S. history; with thousands of pages of new regulation being issued each year. From health care to the environment to financial transactions, all these new regs are just adding up to increased costs that will ultimately be passed on to the consumer. ObamaCare hasn't stemmed the rapid rise in health care costs. Instead, it appears to have accelerated cost increases. The EPA's pending crack down on carbon emissions, are only going to make energy more costly for all of us; starting in January. The Interior Department's hold on domestic oil drilling will just make oil even more costly going forward. And, the supposed consumer financial protection will create higher transactional costs for the banks which will result in lower interest on our savings accounts and increased fees for other banking activities. Like it or not, regulation is another form of tax that the consumer will ultimately have to pay. Again, taking money away from the economy.

5. Continued Debilitating High Unemployment. There are 15 million unemployed workers in this country. On top of that, there are 8 million temporary workers; most of which would prefer a full-time job. Then, you have about 10 million workers who are totally discouraged from even looking for a job. All in all, you have about 21% of this nations workforce who are just limping along and who are not being full-time consumers. That means that 1 out of every 5 employable workers are not spending the kind money that would be needed to grow our economy.

Next Thursday, President Obama will take another swipe at trying to grow the economy and create jobs. But, unless he can address all of the above issues, we will see no improvement from this very psychological recession: a recession that isn't technically defined as such but, one that many Americans feel just the same.

No comments: