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Recession Eases as Rich Get Richer

Posted May 20, 2009

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RECESSION EASES: Consumers feel their buying power is enhanced. The Consumer Balance Index (CBI), which tracks consumer perception of the balance between their assets and income versus their debt and pace of spending, surges seven points between April and May to 85.

At 85, the CBI has regained 12 of its 22-point loss, from its pre-recession reading of 95 in October 2007 to its October 2008 low of 73.

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THE RICH GET RICHER: The recent surge in the value of common stocks and bonds, as well as continued consumer restraints on spending, have made the rich richer by restoring a portion of the assets—trillions of dollars in stocks and bonds, as well as real assets—destroyed at the outset of the recession.

The proportion of consumers who are affluent enough to have the “Strongest” financial balances surges four points, from 16% in April to 20% in May. In addition, the percent with the “Second Strongest” financial balances jumps five points, from 11% in April to 16% in May.

While the rich got richer, the proportion of consumers with the “Weakest” or Fourth Strongest” financial balances remained virtually unchanged – decreasing by only one point from 28% in April to 27% in May.

Click here to see table

The increase in the number of consumers with the “Strongest” financial balances bodes well for the economy, in that they have the highest propensity to buy new cars, housing, air travel, hotel stays, and other major goods.

In May, the index measuring propensity to purchase major goods steps down from a high of 101 among those with the “Strongest” financial balances to a low of 41 among those with the “Weakest” balances.

A Contradictory Point of View

THE BUREAU OF ECONOMIC ANALYSIS (BEA) reports the recession is not easing but deepening. Its April report shows a 6.1% decline in Gross Domestic Product (GDP) in the first quarter 2009, which is close to the 6.3% rate of decline in the fourth quarter of 2008.

Although seeming contradictory, there is truth in both the BEA report that GDP is shrinking and the 8sages.com report that the recession is easing. As Voltaire once observed, the absolute truth does not lie in a choice between extremes but somewhere outside them.

The purchase of major goods by consumers who are getting richer will ease the recession. The negative effect on the recession of shrinking economic output – as indicated by the BEA report on GDP – is mitigated by growth in the proportion of consumers whose financial balances put them in a position to buy major goods.

Simultaneously, the grip of recession will tighten for consumers with the “Weakest” and “Fourth Strongest” financial balances as GDP shrinks, decreasing employment opportunities.

LOOKING AHEAD: The government, financial experts and investors are torn, in that they believer the recession has bottomed and also believe that hard times lie ahead.

Obama sees “glimmers of hope.” Bernanke sees “shoots of green.” Both warn that the nation will experience hard times as it fights its way out of the recession.

Experts, in some number, see the recession easing but also see a tough road ahead. The one-handed economist Truman longed for is not in sight.

Investors, believing that a turn in the economy is near but fearing the recent upsurge stock prices is not sustainable, vacillate and quiver. The ratio of potential buyers to potential sellers drops from 1.40 in April to 1.04 in May, after jumping from 0.61 in February and 0.94 in March to 1.43 in April.

Click here to see graph

The next report on the CBI will be released in mid-June.

TO MAKE SUGGESTIONS OR ASK QUESTIONS:
Please phone Leo J. Shapiro CEO SAGE: Survival and Growth Enterprises LLC. He can be reached in Tucson Arizona at 520-878-0188.

TO MAKE SUGGESTIONS OR ASK QUESTIONS:

Please phone Leo J. Shapiro, CEO of SAGE Survival and Growth Enterprises LLC. He can be reached in Tucson, Arizona at 520-878-0188.