Today’s Headlines: The Recession That Won’t Go Away

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Today’s Headlines: The Recession That Won’t Go Away
August 12, 2014
Recession? What recession?

Technically, the US has been out of a recession since June 2009. However, many Americans think we are still in recession. In a NBC/Wall Street Journal poll from March, 57% of those surveyed thought the economy was still in recession despite it having ended five years ago. At least that is better than the ABC/Washington Post poll from December 2013 where 80% of respondents thought we were still in a recession.

A report recently released by the Federal Reserve on economic well-being in the US echoes that sentiment, reflecting a strange mix of optimism and pessimism. The report covers survey results based in September, so the results are lagging – yet still relevant.

Could Be Better, Could Be Worse

Over 60% of the respondents in the Fed’s report said they were “living comfortably” or “doing okay”. That corresponds roughly to the 64% of people that reported that they were about the same financially, somewhat better off, or much better off than five years prior. A little over half of the respondents are putting some part of their income away for savings. 21% of respondents expect their income to go up and another 61% expect it to stay the same.

These don’t sound like responses from a recession. Why do people continue to think that we are in one?

Part of the issue may be relentless news coverage looking for sensational bad news, but another part may be more subtle and fundamental. Wage growth is stagnant, people’s safety nets have been damaged, and they are uncertain about the future. Consider these other observations from the report:

  • Homes – 65% of homeowners believed their home was worth more (45%) or the same (20%) five years ago compared to the present.

  • Medical – 43% of people could not afford the out-of-pocket costs for any major medical expense, and 34% had skipped some form of medical care in the past year because they could not pay for it. These results were taken before the ObamaCare rollout and implementation, but it is safe to say that uncertainty was high.

  • Savings – 57% of respondents used up at least some of their savings to get through the recession, and only 48% said they could cover a $400 emergency expense without borrowing money or selling something.

  • Retirement – 40% of respondents aged 45 and older who had not retired yet planned to delay their retirement date due to the recession. Only 18% expect to stop working altogether upon retirement.

  • Credit/Debt – Almost ¼ of the respondents had education debt, with an average of $27,840. Credit availability is perceived to be low, with close to half of the respondents not confident that they could qualify for a mortgage.

While the stock market reaches new highs, its growth remains highly concentrated among the affluent. It is true that 88 million Americans have 401(k) accounts today (source: American Benefits Council), and that 61% of aggregate 401(k) assets are invested in stocks. However, for most of the 145 million adult Americans who lack such accounts, stock market gains remain out of reach. Far too many of these Americans are saddled with crushing debt load and live paycheck to paycheck, thus feeding the assumption of recession.

The Takeaway

Pardon the overused cliché, but the growth that has pulled us out of recession is located more in Wall Street than in Main Street. This disconnect makes people feel as though we are in recession, even though that has not been the case for over five years now.

For the economy to take off and make everyone truly feel that the recession is over, the increases in new jobs and wages for existing jobs must rise enough that ordinary Americans are comfortable spending again. This dovetails with the Fed’s philosophy of holding interest rates low until more job slack has been removed and wages start to rise.

As our growth slowly picks up speed, eventually jobs numbers will hit a turning point, wages will rise, the Fed will raise interest rates and stocks will fade for a time. It will be Main Street’s turn over Wall Street until consumer spending drives stocks back up again. At that point, people will finally agree that the recession is over.

However, we are probably at least a year away from that point, and maybe longer if world turbulence spills over into the economy. Stocks may keep correcting for a bit, but you are probably better off to stick with them well into 2015.

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