4 Reason the Economic Crisis Isn’t Over
July 3rd, 2009
There has been a great deal of talk recently about “green shoots” and a pending economic recovery.�Unfortunately, when I analyze the financial and economic landscape, one conclusion becomes quite clear:�The economic crisis isn’t over, it’s just getting started.�The federal government’s astonishing debt and deficit levels, combined with a consumer who is saving more and spending less, will lead to higher unemployment, more bailouts, an increase in interest rates and adverse inflation.�Below are the four main problems the U.S. economy faces.�
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1)The Consumer is Broke- Over the last 25 years, consumer spending as a percentage of GDP rose from 61% to 70%.�� This incredible increase in spending has been fueled by both a decrease in savings as well as an increase in household debt.�The following government statistics tell the story:
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��������� Since the early 1960s, the average Personal Savings Rate has been about 7%.�By 2006, the Personal Savings Rate actually fell below 0%.
��������� Since the Reagan years, the Household Debt Service Ratio has averaged 12%.�Today, even with extremely low interest rates, this ratio has increased to about 14%.�
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Presently, a paradigm shift is taking place.�Having seen the value of their investments and homes significantly decline, households are increasing savings, paying down debt and, as a consequence, spending less money on discretionary items.�We’ve already seen the Personal Savings Rate rise to over 4% this year and I expect this rate to get back to the aforementioned 7% historical rate.���
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This shift in consumer spending habits will have a profound effect on the economy.�Basically, there’s too many companies making too much stuff, and too many stores selling all this stuff.�Expect more layoffs and reduced corporate profits in the coming years.
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