So far, the recovery of the U.S. economy has been led by the manufacturing sector rather than consumers. How much help can we expect from consumer spending in 2012? Just a little, according to the University of Michigan, which reports that consumer sentiment remains near its all-time low.
Speaking at the university’s economic outlook conference in November, Survey Director Richard Curtin offered a pretty pessimistic forecast. The government’s efforts to stimulate the economy by reducing taxes and interest rates should have sparked new consumer spending by now. But this time is different. Why? Unlike big government, consumers are taking a more long-term view, he explained.
“Unlike past recessions, when consumers viewed downturns as temporary inconveniences, the current economic crisis may represent a tipping point toward a more permanent transformation of consumer preferences,” Curtin said.
Asked about their financial prospects for the year ahead, just one in five households anticipated any improvement. “The financial optimism that has been the hallmark of American consumers has disappeared in the past four years due to bleak income and job expectations,” Curtin said.
Aside from current income, home ownership represents the largest and most important asset for most families. Unfortunately, for many households, home ownership now represents the largest and most troublesome liability. Most expect the value of their homes to decline in the year ahead, and for years to come.
Perhaps the most significant lesson consumers learned from the Great Recession was that personal saving was their best defense against economic reversals, Curtin said. Thus many have started by paying down debt and curtailing use of their credit cards. As incomes slowly increase in the years ahead, the savings rate will move higher. Ironically, saving rather than spending will further restrain economic growth.
Consumer attitudes are colored by a deep lack of confidence in government fiscal policies, especially when it comes to jobs, Curtin said. The economy lost 8.7 million jobs from late 2007 to 2009. While government points to the 2.2 million jobs gained back in the past two years, consumers remain fixed on the 6.5 million left behind. “Consumers anticipate no significant improvement in the unemployment rate during 2012,” Curtin said. “It is hard to over-emphasize the critical role played by the jobs shortfall in lowering long-term economic expectations.”
Stagnation best describes the current economic situation, he concluded. The degree to which the economy strengthens or weakens in the next few years is dependent on a host of political and economic unknowns.
If the University of Michigan’s take on the consumer is accurate, it looks like the manufacturing sector will have to continue leading the recovery in 2012.