The Fattest Canary in the Coal Mine

The big question facing global economic planners is whether this recession has in fact ebbed and is beginning, albeit an ultra-slow, path to recovery or whether we are either about to experience of "double dip" (recession, part deux) or even whether we ever got out of part one. The austerity measures favored by European central planners is both a reaction to the undisciplined "over-borrowing" at every level in the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and the near collapse of at least two of those European Union economies (Greece and Spain with Ireland quivering). Conservative EU governments (notably pressured by economic powerhouse Germany) have forced severe austerity measures on the weakest member and increasingly harsh austerity on themselves. Deficits have been ruled the new super-menace by these nations, and there are many factions in the United States that agree deficit reduction is priority one. Indeed, Europe in general, but Germany in particular, dread the inflationary menace of a devalued currency based on the historical economic horrors of the post-World War I, perhaps more than an out-and-out depression.

But the other faction, notably led by the Obama administration and voiced by both the President and Treasury Secretary Tim Geithner, is equally terrified that imposing governmental spending cuts too fast, removing the only major spending consumer in the marketplace, the government, before the private sector is comfortable enough to resume spending, will send the global economy into an even bigger downward spiral. Corporate America, at least at the highest levels, has accumulated enough cash to begin hiring again, but they are completely unwilling to add workers without a whole lot more in the way of evidence of sustained growth and clear consumer demand. So in the question of where we are, recession or recovery, it might be valuable to take a look at that segment of the consumer marketplace most able to spend money.

Bottom line, how individuals spend pretty much determines how the economy is doing. The July 17^th New York Times: "The American consumer accounts for an estimated 60 percent of the country's economic activity [Dekom: some say 70%] But the Top 5 percent in income earners, those households earning $210,000 or more, account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody's Analytics.

The most recent numbers are not reassuring and tend to support the Obama administration's view that the consumer demand is insufficient to replace the government's stimulus spending at this time or any time in the near future. "According to Gallup, spending by upper-income consumers, defined as those earning $90,000 or more, surged to an average of $145 a day in May, up 33 percent from a year earlier." Then in June, that daily average slid to $119. "I think a lot of that feeling that the worst was over has sort of abated," said Dennis J. Jacobe, Gallup's chief economist. The Times. It appears that there was momentary optimism, defeated by a too-conservative-too-soon European Union reaction to the malaise followed by a downgrade in recovery projections by the Federal Reserve.

Indeed, the trend lines at some of the highest-end consumer indexes all say the same thing: rich folks don't believe that the recovery has really taken hold, and they are retrenching in their consumer outlays. While the wealthy emerged from their late 2008 consumer-wallet shut down in 2009, the numbers suggest that the latter half of 2010 is going to reign in that spending once again: At the high end, luxury hotel chains like the Four Seasons and Ritz Carlton said bookings were much stronger earlier this year but had recently slowed. And upscale retailers, including Saks and Neiman Marcus, said sales growth eased in June. Overall retail sales slid in June from May, the government said this week." The Times.

My next quote comes from a insider business Website, theDeal.com (July 16^th), which took a little journey into the not-so-distant past when governments played the austerity card a bit too soon: "The [contemporary] parallel here is with the 1930s, when the British Labour Prime Minister James Ramsay MacDonald attempted to maintain a balanced budget despite falling tax revenues after the Wall Street Crash. MacDonald eventually caved in to pressure to cut spending on unemployment benefits and public-sector jobs, and destroyed his political reputation and mental health in the process. Austerity on both sides of the Atlantic, as we now know, helped snuff out a nascent recovery and kept the world in an economic depression. Which lasted years and years and years, the markets didn't fully recover until well after WWII."

Is Britain's new Prime Minister, David Cameron, the new James Ramsey MacDonald, hell-bent on cutting his country's deficit even if it plunges the UK back into the economic mire, a policy that is sweeping the European Union? It sure looks like it. "With a relentless battery of policy announcements, Mr. Cameron and his coalition of Conservatives and Liberal Democrats have proposed to couple the deep deficit cuts the conservatives sketched out during the May general election campaign with a wider effort to break the mold of big government in Britain that, despite Lady Thatcher's best efforts, has largely prevailed since World War II." New York Times (July 21^st).

The balancing act of monetary and fiscal policy is never easy, a high-wire balancing act constantly in need of very sophisticated fine tuning. For those who believe in simple solutions, let the government solve everyone's financial problems by spending, on the one hand, or cutting taxes, lowering deficits and eliminating business regulations, on the other, they would all be disappointed at the overall economic impact on their standard of living if the government indeed always followed such simplistic and obviously appealing uniform policies. Large deficits are very disruptive of longer term economic growth, but severe recessions (perhaps even depressions) can truncate the ability to have longer term growth rather significantly. Reading tea leaves and checking the fattest canary in the mine are essential parts in the constant monitoring and tilting of the impact of governmental policies on our economic survival.

I'm Peter Dekom, and in a complex economic world, simplistic uniform economic solutions based on appealing slogans and simple philosophic assumptions never work.