Depression Babies

There are a few survivors of The Great Depression left, and many of us have memories of parents and grandparents who lived through that era. I watched what I perceived as the strange behavior of hard-working folks, living a relatively sparse life, and saving every penny they could. The shopped coupons for hours a day, only bought at sales, looked only at used cars, and preferred lower-paid government jobs, knowing that those pensions were unlikely to fail.

My own father was a depression baby, and I suspect that nothing, not even World War II, ever changed him like the economic hardship of that era. His modest home in an upscale neighborhood in Chadds Ford, Pennsylvania, was run down, in need of patching and painting – luxuries that he would never implement. He used newspapers for table cloths, fixed his own cars (which he always bought used), built his own computer and rarely bought clothes. Yet he was a well-known print and radio journalist in the region (Wilmington, Delaware – Philadelphia, Pennsylvania), reasonably well paid with great benefits, and managed to become the local art and food critic – free theater, free movies, free concerts and free food!

Pretty clearly, this current economic “managed depression” or “severe recession,” however you categorize this malaise, will leave more than one generation with a legacy of scars. It may not even be the severity of this meltdown that has the greatest long-term impact, but the duration. The vast majority of economists predict a sustained decline in core economics: long-term high unemployment rates, slow if any medium term growth in home prices, very limited increases in consumer demand and the contracting buying power of the U.S. dollar. No one predicts any major improvement in employment until the end of 2010, and the economy, even according to government sources like Treasury Secretary Timothy Geithner, will offer a weak and fragile, if not lethargic, recovery when it does begin.

Fear is in the numbers. The Department of Commerce notes that current savings rates are the highest that they have been in fifteen years. The June 26^th New York Times: “The personal saving rate, which dipped below zero during the housing boom as Americans tapped home-equity loans and other easy lines of credit, rose to 6.9 percent in May, the Commerce Department reported. That was its highest point since December 1993.”

Even with a surprising 1.4% rise in personal income, consumer spending reflected a scant 0.3% increase. The Times: “Steep declines in home values and individual stock portfolios have erased trillions of dollars in household wealth. Economist Joshua Shapiro of MFR noted that he was ‘clearly seeing signs of households altering their behavior in the face of large capital losses in investment and real estate portfolios, an abysmal labor market, and tight credit.’”

Increasing savings rates is normally a good thing; it increases capital availability for both the debt and equity markets, creates longer-term stability by providing what is effective an economic shock absorber and generally is viewed as creating more realistic and sustainable standards of living. Normally. But in times of severe economic contraction – what we are clearly experiencing now – opting for saving over spending can actually deepen and extend an economic downturn. Without demand for goods and services, without consumers exercising their buying power, clearly the jobs and housing picture lack the stimulus necessary to rebound. Instead, consumer demand appears to have been replaced with the government stimulus package.

The Times again: “A 1.4 percent rise in personal incomes was an indication that money from the government’s $787 stimulus program was beginning to flow through the American economy… ‘That’s the whole point — put money back in the pockets of consumers and households and they’ve accomplished that,’ Nariman Behravesh, chief economist at IHS Global Insight, said. ‘The good news is, it’s working. The question is, how much of this is a blip?’ And how much of it depends on the largess of the government? Although disposable personal income rose at a seasonally adjusted rate of $178.1 billion in May, the Commerce Department also reported that private wages and salaries decreased $12.4 billion.”

If it is the stimulus package alone that is responsible for demand, what happens when the government program comes to an end? Are the behavioral changes in savings and spending likely to keep U.S. growth in a “very slow rise” mode for the foreseeable future? Is CNBC’s Jim Cramer right? Do we really need “federal stimulus package, part 2”? And exactly who in Congress is going to propose this solution and increase the federal budget accordingly? Once again, time will tell. And we may actually have another incarnation of “Depression Babies” to deal with.

I’m Peter Dekom, and I approve this message.