Henes: The Top 5 Questions for the US Consumer
Consumers drive the American economy.
However, as of late, they feel less like drivers and more like passengers on a runaway train.
As the train barrels dangerously down the tracks, here are the five questions U.S. consumers should consider.
Will Prices Continue to Rise? Core producer inflation saw its largest gain in six months. Tobacco and light truck costs increased the most, but food prices (with potatoes leading the way) also increased. Gas prices dropped. But for how long? If gas prices join food’s inflationary trend, consumers will have less discretionary income. With 70 percent of our GDP dependent on consumer spending, our economy will continue to sputter along (at best). Combine rising inflation with the housing depression, high unemployment and uncertain equity markets and consumers may not be ready to spend for some time.
What is the Trump Phenomenon? We already know about The Apprentice and tall buildings. But “The Donald” recently unveiled a new phenomenon. On CNBC, commenting on his first ever purchase of stock, Donald Trump said, "I went out yesterday and said, 'Look, I'm not getting interest on CDs'...so I went out and bought some stock." And, with that, the Trump Phenomenon was born. Based in large part on the stalled economy, the Fed announced that it will keep rates “exceptionally low” through the middle of 2013. With interest rates at zero, ordinary, hardworking Americans, baby boomers and retirees cannot earn a fixed return on their savings, so they, like “The Donald,” are being lured into the stock market. Instead of baby boomers and retirees investing their money in risk-averse investments with a fixed yield, they will be subject to the (increasing) uncertainty and volatility of the markets.
Do Consumers Have Faith in the Political System? No. We have a crisis of political confidence. According to a recent Washington Post poll, 78 percent of Americans are dissatisfied with the U.S.'s political system, 71 percent think the federal government is focused on the wrong things and 73 percent are not confident that "Washington" can solve our economic problems. This is not surprising coming off the heels of the “debt ceiling debate” debacle. Our political leaders should take heed and start focusing on fixing our problems rather than running for re-election.
Why Is Consumer Confidence So Poor? Thomas Reuters’ Survey of Consumer Confidence fell from 71.5 in June to 63.7 in July. According to Richard Curtin, the Survey’s chief economist, “more than twice as many households reported that their finances had worsened rather than improved during the past year, eight-in-ten anticipated no financial improvement during the year ahead, and six-in-ten expected no financial gains over the next five years.” 60 percent of households do not expect to have any financial gains over the next five years! No wonder confidence is so bad. But confidence begets confidence. Consumers enduring their leaders spewing warnings of economic Armageddon will not increase confidence. Leadership and bold solutions to our real problems will.
Should U.S. Consumers Pay Attention to Europe? Yes. While Europe’s debt and economic crisis may not impact the U.S. consumer’s life on a daily basis (other than potential stock market gyrations), in some ways we may be looking into the mirror on the wall. European nations are implementing “austerity measures” to combat their massive debt loads and deficits threatening to crush their economies. These austerity measures by and large are taking the form of spending cuts and tax increases. The problem with austerity measures is they slow growth in the short run (and potentially longer), which is evidenced by Europe’s second quarter near zero GDP growth. As the U.S. focuses on fixing its long term debt and entitlement problems, we may see the implementation of our own type of austerity measures. Consequently, don’t expect growth to increase significantly anytime soon.
In these uncertain and dark economic times, consumers do not have a lot to cheer about. However, if the consumer qua voter demands that our political leaders focus on fixing our problems, the U.S. can re-build its foundation and position itself to grow over the long term.
Jon Henes is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in the United States and abroad across a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics, federal, state and local fiscal issues.