Economic News and 1/3 of You

The following was originally posted on Lou’s blog on March 22, 2008.

It isn’t pretty, is it? Most Americans think that we are already in a recession, and the indications seem to support that belief. A full third of young adults (19 – 39) already need help. Of course, the financial markets are in turmoil, and the lenders and investment banks need help too.

For the first time since tracking began in 1945, the debt Americans owe on their home mortgages exceeds the equity they’ve built up in those homes.

Paul Krugman (NY Times columnist and Nobel Prize winner) predicts that the values of homes in America will decline by 25 percent, representing $5 to $7 Trillion in value (yes, "trillion" with a "T"). http://money.cnn.com/2008/03/14/news/economy/krugman_subprime.fortune/index.htm

During the past 10 years, all US consumer debt rose at an average 7.5 percent annual rate, compared to 4.2 percent annually for the preceding 10-year period. As a result of the increased rate, consumer debt has grown by $3 Trillion. Personal spending also has grown disproportionately during the most recent 10 years.

The average household now owes $7,000 in credit card debt, up from less than $5,000 only 5 years ago.

So now, suddenly, people are cutting back on their spending, increasing their savings, and thereby possibly leading the recession. According to Business Week columnist James C. Cooper, the increased savings translates directly to decreased consumer spending, resulting in a decrease in Gross Domestic Product. Hence, it appears to be the consumers leading the recession.

Of course, that leaves us with the age-old question of the chicken or the Nest Egg. Which came first, the recession or the reduction in consumer spending? Does it matter?

Consider the case of Jo Ann Bauer, who lost her job as an events planner at an upscale resort. After moving, trying some lower paying jobs, and finally declaring bankruptcy, she has moved back in with her parents. She’s back in the bedroom where she grew up, only now Jo Ann is 52 years old.

Kim Erickson, a California financial planner, reports that some of her clients are giving financial aid and support to their children in the area of $50,000 per year, often supporting kids who have overextended themselves or who live rather lavish lifestyles.

Anna Maggiore is only 27. When she lost her job as a publicist she ended up moving home with her parents so that she could complete her college studies.

The point is that these people are hardly unique. AARP reports that one-fourth of Generation Xers (28 – 39) receive some financial support from family and friends. It is estimated that one-third of all people ages 19 –39 receive some assistance from family and friends. One-Third!

How many of the other two-thirds are a paycheck away? An illness away? An auto accident away? How many other people would need help if a spouse suddenly left them? How narrow is the separation between those of us who need help and those who do not?

It isn’t a pretty picture at all. If there is any comfort to it, it may be this: For those who do need help, you simply aren’t the only ones. You didn’t make the economy, and you didn’t break it. It will get better, and it will get better for you, too.

That may not be much solace for those who are in danger of losing their homes, or who are foregoing necessities because their family and friends aren’t helping them (regardless of the reasons). The only solace there may be just knowing that others are experiencing the same plight. However, in such times as these, there is little comfort in that fact.

Nope, it isn’t pretty. I hope it doesn’t get worse.

© 2008 Lou

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