Gap clothing made much the same decision last week. Restaurant chains like Friendly's are filing for bankruptcy.
And unemployment is not the primary cause.
No, it is the 91% of the population who are working but whose household income is down who are the problem. The people who are cutting back, causing retailers and their suppliers to do the same have jobs. They are just not making enough to offset the rising cost of gas, food and electricity. Home remodeling, new clothes and a nice meal out are tough to justify when your pay no longer covers the basics.
The larger issue is that US GDP is 70% dependent on consumer demand. If consumers can not afford to buy, companies can not afford to produce, which means they can not afford to hire, which means...a vicious circle. Government spending on much needed infrastructure improvements could pump money into the system but philosophical distrust of government spending remains strong and providing President Obama with any stimulus that might bolster his reelection chances has been ruled out by his political opponents.
The glut of undercompensated consumers is a self-reinforcing mechanism. The causes are global. Without a national commitment to addressing the challenge, it can not change. That consensus existed for much of this century, even as late as the 1970s. Until it returns, the US is fated to live with the consequences of its own atomization. JL
Shobhana Chandra and Steve Matthews report in Business Week:
Tamra Loomis, a graphic designer and single mother of two boys, grows vegetables to trim grocery bills. She uses coupons when she shops. She doesn’t have a monthly Internet charge: She goes to her parents’ house and uses their broadband connection. Loomis makes $17 an hour working at a sign company in Antioch, Calif., and hasn’t had a raise in three years.
The plight of America’s unemployed is terrible. Yet for the 91 percent of those in the U.S. labor force who do have a job, the numbers also tell a dark story. Take-home pay, adjusted for inflation, fell 0.3 percent in August, the third decrease in five months, the Commerce Dept. just reported. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, while the poverty rate jumped to 15.1 percent, a 17-year high.
Salary and benefit growth “has been going nowhere,” says Mark Zandi, chief economist at Moody’s Analytics (MCO) in West Chester, Pa. “One of the key reasons the recovery has stalled is that real incomes have fallen.”
By contrast, in the 1960s, household debt was low, savings were high, and salaries were heading steadily up. And since the end of the 2007-2009 recession, according to Sentier Research, a firm headed by a former top Census Bureau official, those not in the labor force have fared better on average than those who are. Retirees, for example, get their Social Security payments adjusted for inflation. Few workers today enjoy that benefit.
While Federal Reserve Chairman Ben S. Bernanke and President Barack Obama are focused on cutting unemployment, companies including United Parcel Service (UPS) say they may continue to hold down employee pay because of uncertain demand and a surplus of labor. UPS has “a very reasonable contract in place that will show modest, below-inflation increases in wages” for drivers, Chief Financial Officer Kurt Kuehn told investors in a July 26 teleconference.
Retailers such as Kohl’s (KSS) report that high food and fuel prices cut into paychecks. Stock market losses are eroding personal wealth. “It’s hard to see where consumers are going to get a lot of wherewithal to sustain strong spending,” says JPMorgan Chase’s (JPM) chief U.S. economist, Michael Feroli.
Most economists don’t see the U.S. sliding into recession. Yet the worsening outlook for incomes will cause “continued pressure on home prices and on the stock market,” says Malcolm E. Polley, who oversees $1 billion as chief investment officer at Stewart Capital Advisors in Indiana, Pa. There may be higher use of 401(k) loans as emergency funds. Americans will feel even poorer. “Perception is reality from the standpoint of consumers and investors,” Polley says. “We need people to start feeling good about themselves.”
The Bloomberg Consumer Comfort Index, which has been measuring confidence since 1985, slumped in the week ended Sept. 25 to the second-lowest level on record. The share of households saying it was a bad time to buy goods and services was the highest in three years. A record 91 percent of consumers expect that growth in their incomes will match or fall behind price gains in the coming year, according to participants in the September Thomson Reuters (TRI) /University of Michigan sentiment survey, which dates back to 1978. Until people see their wages or the labor market get better, they will be “spending on necessities, not desires,” says Chris G. Christopher Jr., senior principal economist at IHS Global Insight.
Consumer spending rose at a 0.7 percent annual rate in the second quarter, less than half the 2.1 percent pace in the January to March period, the Commerce Dept. reported in late September. Gross domestic product expanded less than 1 percent on average in the January-June period, the worst six months of the recovery to date.
“Most workers don’t have a lot of sway in demanding higher wages unless they have very specialized skills,” says Omair Sharif, an economist at RBS Securities. Employees cannot hope for more bargaining power anytime soon, says Harry J. Holzer, a professor of public policy at Georgetown University in Washington and former chief economist at the Labor Dept. Through August, the U.S. had recovered only about 1.89 million of the 8.75 million jobs lost in the recession. “There is so much slack, it will keep earnings from rising very much,” says Holzer. “It will take most of this decade” to repair the damage.
The bottom line: Take-home pay fell 0.3 percent, adjusted for inflation, in August, one reason consumers aren’t shopping.
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