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Traumatized consumers, businesses reluctant to spend

By Gail MarksJarvis, Chicago Tribune –

Once traumatized, it’s tough to move on with your life without being cautious.

And so goes the economy. Americans are reluctant to spend and businesses are clearly feeling the impact of consumer penny-pinching as companies report earnings for the last quarter of 2011.

Americans had more money in their pockets in December as wages and salaries climbed 0.4 percent. But they weren’t eager to spend it. Rather, despite early holiday season hype about fervent shopping, consumers spent cautiously and on deals.

Instead of spending like they did when they used phantom home equity as an ATM before 2007, they moved small December pay increases into savings. The personal savings rate rose to 4 percent from 3.5 percent as consumers tried to protect themselves from job loss and prepare for the future. After all, they know counting on the stock market and appreciating home prices to build a nest egg can be folly.

“There are signs of a renewed hunkering-down mentality,” said Gluskin Sheff economist David Rosenberg.

With about half of large companies done reporting fourth-quarter results, companies are feeling the impact of reluctant consumers at a time when foreign purchases are slowing and when cost-cutting to boost profits has already been exhausted.

“Trends generally point to slowing global growth and a price-sensitive U.S. consumer,” said Barclays strategists Barry Knapp. “The V-shaped recovery in corporate profits seems to be ending.”

During the economic recovery that began in 2009 analysts have repeatedly made the mistake of anticipating a rebound much stronger than the one that’s materialized. Real GDP growth last year of 1.7 percent was about half of what “the economic intelligentsia told us we should get at the start of 2011,” notes Rosenberg.

The bullish crowd has been expecting a return of what Wall Street calls “animal spirits.” That means people, businesses and investors hungry for wealth and willing to take risks and act aggressively as they press through the unknown. But this time the known — or the fact that a disaster in finance threatened to unleash a global depression in 2008 — has left a generation of individuals and business people timid and reluctant to swing for the fences.

Companies continue to hoard cash. Fourth-quarter spending on equipment was disappointing, given a depreciation tax incentive that was supposed to induce purchases.

And some banks, fearing the unknown in dealing with Europe’s debt crisis, are once again cutting back on lending, according to a Federal Reserve survey of loan officers. That could crimp growth as businesses have trouble borrowing and consumers have trouble getting mortgages and refinancing homes.

Meanwhile, the Federal Reserve has made it clear it intends to keep interest rates low into 2014. Interest rates are the Fed’s medicine for trying to put a spark back into an anemic economy, and some Fed members have suggested they might try to go even further with another round of quantitative easing.

But with the Fed expecting unemployment to remain above 8 percent this year, as housing prices keep falling, and as banks go into a new phase of Scrooge-like lending, the logical question is whether the Fed’s medicine can perk up spending when both banks and individuals remain skeptical of the animal spirits that led them astray prior to 2007.

It’s not simply the spirits that have lost their roar. Americans remain heavily in debt and without the savings they will need for retirement while they worry about Social Security and Medicare cuts. Banks are still playing make-believe with some of the loans on their books, which means they are less able to lend than meets the eye.

Some economic theory is founded on the belief that people are rational about spending. And if there is truth in that, one must wonder why low interest rates should unleash animal spirits when people and banks are still licking their debt wounds.

Although observers were able to ignore the poison of excessive debt while companies cost-cut their way to record profits, Knapp notes that the “realities of a subpar deleveraging-impaired recovery now are emerging in earnings and margins” as fourth quarter results are being reported.

Now, analysts wonder if the U.S. is on its way to becoming like Japan in the 1990s. Japan has gone through 20 years of stagnation after a real estate bubble burst and banks remained paralyzed by bad debts. The low interest rates imposed to revive the economy have yet to do so. The Japanese stock market is still off 50 percent from its 1990 high.

In the U.S. the full stock market, measured by the Wilshire 5000 index, has climbed 101.78 percent since the gloomiest point in the U.S. financial crisis in March 2009. Yet stocks still have not recovered from the trauma of the U.S. financial crisis. They remain down 12.45 percent from the high of Oct. 9, 2007.

Still, stocks do move in anticipation of a better future and sometimes provide early insight into a stronger recovery than economic data suggest. In that regard, the stock market in January was indeed encouraging. The Standard & Poor’s 500 index climbed 4.36 percent — the strongest move in January since 1997. And for investors that’s a good sign.

There’s a Wall Street saying that, “So goes January, so goes the year.” Standard & Poor’s 500 analyst Howard Silverblatt notes the saying has been true 73.2 percent of the time.

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