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Once
traumatized, it’s tough to move on with your life
without being cautious.
And so
goes the economy. Americans are reluctant to spend and
businesses are clearly feeling the impact of consumer
penny-pinching as companies report earnings for the last
quarter of 2011.
Americans
had more money in their pockets in December as wages and
salaries climbed 0.4 percent. But they weren’t eager
to spend it. Rather, despite early holiday season hype
about fervent shopping, consumers spent cautiously and
on deals.
Instead
of spending like they did when they used phantom home
equity as an ATM before 2007, they moved small December
pay increases into savings. The personal savings rate
rose to 4 percent from 3.5 percent as consumers tried to
protect themselves from job loss and prepare for the
future. After all, they know counting on the stock
market and appreciating home prices to build a nest egg
can be folly.
“There
are signs of a renewed hunkering-down mentality,” said
Gluskin Sheff economist David Rosenberg.
With
about half of large companies done reporting
fourth-quarter results, companies are feeling the impact
of reluctant consumers at a time when foreign purchases
are slowing and when cost-cutting to boost profits has
already been exhausted.
“Trends
generally point to slowing global growth and a
price-sensitive U.S. consumer,” said Barclays
strategists Barry Knapp. “The V-shaped recovery in
corporate profits seems to be ending.”
During
the economic recovery that began in 2009 analysts have
repeatedly made the mistake of anticipating a rebound
much stronger than the one that’s materialized. Real
GDP growth last year of 1.7 percent was about half of
what “the economic intelligentsia told us we should
get at the start of 2011,” notes Rosenberg.
The
bullish crowd has been expecting a return of what Wall
Street calls “animal spirits.” That means people,
businesses and investors hungry for wealth and willing
to take risks and act aggressively as they press through
the unknown. But this time the known — or the fact
that a disaster in finance threatened to unleash a
global depression in 2008 — has left a generation of
individuals and business people timid and reluctant to
swing for the fences.
Companies
continue to hoard cash. Fourth-quarter spending on
equipment was disappointing, given a depreciation tax
incentive that was supposed to induce purchases.
And some
banks, fearing the unknown in dealing with Europe’s
debt crisis, are once again cutting back on lending,
according to a Federal Reserve survey of loan officers.
That could crimp growth as businesses have trouble
borrowing and consumers have trouble getting mortgages
and refinancing homes.
Meanwhile,
the Federal Reserve has made it clear it intends to keep
interest rates low into 2014. Interest rates are the
Fed’s medicine for trying to put a spark back into an
anemic economy, and some Fed members have suggested they
might try to go even further with another round of
quantitative easing.
But with
the Fed expecting unemployment to remain above 8 percent
this year, as housing prices keep falling, and as banks
go into a new phase of Scrooge-like lending, the logical
question is whether the Fed’s medicine can perk up
spending when both banks and individuals remain
skeptical of the animal spirits that led them astray
prior to 2007.
It’s
not simply the spirits that have lost their roar.
Americans remain heavily in debt and without the savings
they will need for retirement while they worry about
Social Security and Medicare cuts. Banks are still
playing make-believe with some of the loans on their
books, which means they are less able to lend than meets
the eye.
Some
economic theory is founded on the belief that people are
rational about spending. And if there is truth in that,
one must wonder why low interest rates should unleash
animal spirits when people and banks are still licking
their debt wounds.
Although
observers were able to ignore the poison of excessive
debt while companies cost-cut their way to record
profits, Knapp notes that the “realities of a subpar
deleveraging-impaired recovery now are emerging in
earnings and margins” as fourth quarter results are
being reported.
Now,
analysts wonder if the U.S. is on its way to becoming
like Japan in the 1990s. Japan has gone through 20 years
of stagnation after a real estate bubble burst and banks
remained paralyzed by bad debts. The low interest rates
imposed to revive the economy have yet to do so. The
Japanese stock market is still off 50 percent from its
1990 high.
In the
U.S. the full stock market, measured by the Wilshire
5000 index, has climbed 101.78 percent since the
gloomiest point in the U.S. financial crisis in March
2009. Yet stocks still have not recovered from the
trauma of the U.S. financial crisis. They remain down
12.45 percent from the high of Oct. 9, 2007.
Still,
stocks do move in anticipation of a better future and
sometimes provide early insight into a stronger recovery
than economic data suggest. In that regard, the stock
market in January was indeed encouraging. The Standard
& Poor’s 500 index climbed 4.36 percent — the
strongest move in January since 1997. And for investors
that’s a good sign.
There’s
a Wall Street saying that, “So goes January, so goes
the year.” Standard & Poor’s 500 analyst Howard
Silverblatt notes the saying has been true 73.2 percent
of the time.
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