Diligent Cost-Cutting
American business has been diligently cutting costs since the recession started in December 2007, especially labor costs. A recent survey shows that over half of adults have been affected by some combination of layoffs, wage and benefits cuts, involuntary furloughs and involuntary shifts to temporary jobs. Many may never be restored to their earlier statuses. Those layoffs lucky enough to find new jobs often are paid less than earlier.
About 20% of major employers with over 1,000 workers cut or eliminated their 401(k) plan contributions during the downturn but half have failed to restore them so far. Of those with 500 or fewer employees that cut contributions, only 36% have reinstated them or plan to in the next 12 months, according to a Fidelity Investments survey. Furthermore, 10% of all employers plan to reduce or eliminate matching 401(k) contributions in the next year.
Consumer Spending
All the layoffs, involuntary furloughs, and temporary jobs and benefit and wage reductions have been instrumental in the rebound in corporate profits, but devastating to employee compensation. This spells weakness for consumer spending. Also, consumers are no longer saving less and borrowing more on credit card, home equity and other loans to bridge the gap between income and desired spending growth. Furthermore, home equity has evaporated (Chart 6 ) and tight lending standards on credit card and other loans prevail. So they're on a saving spree and debt reduction binge, further slashing the outlook for consumer spending, the third cylinder that normally fires to propel economic recovery from recessions.
In fact, without massive fiscal stimuli, subdued compensation and the recession would have pushed consumer outlays down substantially. Our calculations show that consumers saved 80% of the tax rebates they received in the summer of 2008. And they initially saved 100% of 2009's tax cuts and special payments of $250 for each Social Security beneficiary. Those actions resulted in the spikes in the saving rate shown in Chart 5. This is remarkable since the tax cuts did not go to highincome people, normally the only big savers. Also, those folks are relatively few in number so they received few of the extra Social Security checks. Consequently, middle- and lower-income households stepped out of character to save heavily.
Households are deleveraging their balance sheets with a vengeance. Since the end of the fourth quarter of 2007 when stocks began to collapse, personal sector assets have fallen $3.0 trillion. Some $1.8 trillion was in equities and $277 billion in mutual funds due to losses on balance and withdrawals from equity direct ownership and from mutual funds. Investors put money into mutual funds on balance in January, March and April, but cut their holdings, especially in stock funds, in May and June. Also, private pension reserves fell $754 billion from the end of 2007 to the end of March 2010 and government pension reserves in household accounts were down $290 billion. Increases of Treasury bond holdings of $533 only partially offset the decline in government agency and securities of $593 billion. Meanwhile, liabilities of the personal sector dropped $500 billion, largely due to the decline in mortgage and consumer debt as some debts were repaid while others were written off as hopeless.
Support By Government
Since the recession began in December 2007 through June 2010, personal income from wages and salaries, proprietors' income, rents, interest, dividends and transfers such as pension benefits, Social Security, Medicare and Medicaid payments and unemployment insurance increased $285 billion. It would have declined $247 billion without a $532 billion increase in government transfer payments. These increases in government transfers also flowed through to Disposable Personal Income (after-tax income), which further benefited by lower personal taxes that fell $382 billion due to tax cuts and the lower taxable income resulting from layoffs, wage declines and bonus cuts.
In total, DPI was enhanced by $532 billion from the increase in government transfers and $382 billion from the lower taxes. Without these significant boosts, DPI would have fallen $247 billion since December 2007 instead of rising $667 billion. Without question, and much more so than in any previous post-World War II recession, the consumer has been supported by massive government money in the form of increased transfers and tax cuts. And these numbers do not include wages from jobs created by federal spending on infrastructure or saved by federal transfers to state and local governments to curtail teacher layoffs and other employment reductions.
Where Did The Money Go?
What happened to that $667 billion increase in DPI and what does it tell us about the likelihood of a chronic consumer saving spree? About 43% of it was spent and 64% saved, so maybe some of the earlier tax cuts were spent, but with delays. Nevertheless, a 64% marginal saving rate does seem to support our chronic saving spree thesis.
