The Stagnation Two-Step:Pessimism and Spending

Richard CurtinResearch Professor and

Director Surveys of ConsumersUniversity of Michigan

Chart 1: Consumer Sentiment Falls Back Toward Recession Lows

2011

Near All-timerecession lows

All time Records: Peak = 112.0 (Jan 2000); Trough = 51.7 (May 1980)Last cyclical low = 55.3 (November 2008); Recent low = 55.7 (August 2011)

2011:1 = 73.12011:2 = 71.92011:3 = 59.62011:4 = 62.6p

Chart 2 : Sentiment Signals Stagnating GDP Growth During Year Ahead

Largest Post 1954 1958 1974 1975 1980 1982 1991 2009

WWII Declines: -0.7% -1.0% -0.5% -0.2% -0.2% -1.9% -0.2% -3.5%

Chart 3: Current Financial Situation of Consumers Remains Dismal

2011

Record Lows

Chart 4: Income Changes Have Remained Negative for Longer Than Ever Before Recorded

2011

Chart 5: Diminished Personal Financial Prospects Expected During Year Ahead

2011

Chart 6: Income Prospects Remain Grim: Majority Expect No Gains in Nominal Incomes

2011

Record Lows

Chart 7: Real Home Prices Expected to Decline Over Foreseeable Future

(Three month moving averages)

%Higher - %Lower + 100

Chart 8: Adequacy of Retirement Savings Remains Low

(Change in Probability of a Comfortable Retirement Given Current Assets Among Those Under Age 65.)

Chart 9: Declines in Household Debt Main Reason for Increase in Saving Rate

2011:2 = -0.6%

First time absolute contraction of debt

Chart 10: Mortgage Debt Declines Partially Offset by Increases in Consumer Debt

Mortgage Debt2011:2 = -2.4%

Consumer Debt2011:2 = 3.4%

Chart 11: Mortgage Debt Still Excessive (Debt as a Percentage of Personal Disposable Income)

Total

Mortgage

Consumer

Mortgage Charge offs:2011:2 = 1.68%

Peak: 2009:4 = 2.82%Avg. 1991-2007 = 0.15%

Mortgage Delinquencies:2011:2 = 10.53%

Peak: 2010:1 = 11.22%Avg. 1991-2007 = 2.24%

Chart 12: Personal Saving Rates

Saving 1940 1941 1942 1943 1944 1945 1946

Rate: 5.7% 12.2% 24.1% 25.6% 26.1% 20.4% 9.6%

Long Term Average = 7%

Recessions: 10-12% Savings

Extraordinary Wartime Savings Acted to Reverse Depression Losses

Stock & Home Appreciation

Chart 13: One-Year Outlook for National Economy Remains Quite Negative

2011

Record Lows

Chart 14: Five-Year Outlook for National Economy Remains Grim

2011

Record LowsDecade Long

Decline

Chart 15: Government Economic Policies: Lost Confidence in Obama’s Policies

2011

Nov-Dec 1987

Oct–Nov 2008

Sep-Oct 2009

Oct–Nov 2010

Oct–Nov 2011

Greater or UnchangedConfidence in Fed 76% 41% 49% 49% 37%

Less Confidence in Fed 19% 57 49 49 61

DK; NA5 2 2 2 2

Total 100% 100% 100% 100% 100%

Chart 16: Loss of Confidence in the Federal Reserve

Oct–Nov 2008

Share of Households

Index of Consumer

Expectations

Lost confidence in Obama and the Fed 41% 39.1

Lost confidence in Obama but not Fed 16 49.4

Lost confidence in Fed but not Obama 20 63.3

No loss of confidence in Obama or Fed 23 74.3

Total 100%

Chart 17: Large Impact of Loss of Confidence in Economic Policies on Consumer Expectations

(October – November 2011)

Chart 18: Year-to-Year Growth in Total Non-Farm Employment Nearly Reaches Prior Peak

Slower Population and Faster Productivity Growth

October 2011 = 1.2% y/y growth October 2011: +80,000 Jobs

Chart 19: Consumers Focus on Job Losses,Obama Focuses on Job Gains

(Total nonfarm employment in millions)

Jobs regained since start 2010: 2.2m or about 100k per month

8.7 million jobs lost from Dec 2007 to

Dec 2009(average monthly

loss = 350k)

Chart 20: Consumer Reports of News about Jobs And Changes in Total Nonfarm Employment

(Three month moving averages)

Chart 21: National Unemployment Rate

Decade Averages:1950s = 4.5% 1960s = 4.8% 1970s = 6.2% 1980s = 7.3% 1990s = 5.8% 2000s = 5.5%

All

Married

Oct 2011: All workersOct 2011All Workers = 9.0%Married Workers = 5.8%

Chart 22: Consumers Expect No Improvement in Unemployment Rate During Year Ahead

Chart 23: Unemployment Decomposition: Ratio of Employed to Labor Force Participation Rates

Peak = 64.7

Peak = 67.3Participation RateOctober 64.2

Employment RatioOctober 58.4

Unemployment rate = 1 – (58.4/64.2) = 9.0%

Chart 24: Employment Population Ratios:Men and Women Age 25 - 34

MenOctober = 80.0%

WomenOctober = 67.0%

Nearly 3 years at all time lows

Under age 25 (October)Men = 47.3% Women = 45.6%

Both at near record lows

Chart 25: Employment Population Ratios:Men and Women Over Age 55

MenOctober = 43.3%

WomenOctober = 32.9%

Employment Ratios (10-year pt. change)Men Women

65 – 69: 34.4 (+4.7) 25.8 (+5.9)70 – 74: 24.8 (+6.0) 13.4 (+2.2) 75 +: 10.0 (+2.3) 5.4 (+1.7)

Unemployment Rate Defined Great Depression8.9% 15.9% 23.6% 24.9% 21.7% 20.1% 17.0% 14.3% 19.0% 17.2% 14.6%

Chart 26: Unemployment Not Growth in Real Personal Consumption Defined Great Depression

Negative Consumption

in five of eleven years

Note: Unemployment in 1929 = 3.2%

Surge in Consumption

During Depression

Chart 27: Modest Growth in Personal Consumption Expenditures Expected in 2012

Declines in PCE: 1974 1980 2008 2009

-0.8% -0.3% -0.6% -1.9%