Senior Vice President, Capital Markets
Lee McPheters, Director of the Economic Outlook Center of the W.P. Carey School of Business at Arizona State University, started off one of the council sessions today at ULI. He began by asking a simple but important question: why has there not been a great recovery after the great recession? The recession officially ended in December 2009 and yet GDP growth has been 2.8% over the last 7 quarters, compared to a quarterly average of 3.3% over the last 50 years. The biggest reason for this, according to Professor McPheters, is the consumer. While there are a number of factors that drive the growth of the US economy, 70% of GDP is made up by consumer spending. And more than ever, the public is skeptical of the economy and, according to poll after poll, feels that the country is heading in the wrong direction.
Why is this if there are so many positive data points? We have had 7 straight months of job growth and are on pace to add 2 million jobs in 2011! It appears that job growth finally has firm footing and we should regain all the jobs that were lost during this past recession by 2013. While not as strong as some had hoped, we are in a definite recovery and fears of a double dip recession have been drastically reduced. Nonetheless, a cloud remains over the public’s perception of this recovery.
Professor McPheters feels that consumers still haven’t regained confidence to go out and spend and this is primarily because of a handful of reasons: oil, housing and a still-high unemployment rate:
- Consumers are constantly reminded of how high has prices are because everywhere they drive they see gas prices posted and every week when they fill up their tanks, they see the meter going up and up. This constant reminder has a huge psychological impact on consumers, even if the differential in what it costs in higher gas prices isn’t that much on the margin in their monthly budget. Especially given that prices in other products have remained relatively constant and in some cases, have gone down!
- Housing prices continue to drop in many markets and should finally stabilize this year. For most Americans, their homes comprise a large component of their wealth and when they see values continue to decline, they become more cautious with their wallets.
- Unemployment remains high overall but especially in certain industries and geographies. For example, in healthcare, unemployment rates are extremely low but in construction, they remain extraordinarily high.
This all leads to consumers going at “half speed” and being more disciplined with their money. This is the “paradox of thrift” – we want people to have less debt and save more, but this actually hurts the overall economy. He said that a 6% savings rate pulls $660 billion from the spending stream – effectively wiping out the effect of the stimulus program! In the end, we can continue to have positive data points coming out every month, but the cloud hovering over the public’s perception has to shift for us to get back to where we want to be.