The new normal economy

Photo: Philip Brewer

The economy is way short of full employment, so naturally, consumer spending is down. Sooner or later employment, I think, will return to normal levels. Consumer spending will return to normal too--but don't look to the first half of this decade as "normal." Normal is something very different.

Jeannine Aversa, AP economics writer, has a piece out that looks at what the early signs of economic recovery will be.

The gist of her analysis is that people are still spending on discretionary items, but spending conservatively. They're still eating out, but they're not getting as many appetizers, bottles of wine, or deserts. They're still going to the spa, but they're going to local spas rather than taking a vacation at a resort spa.

It's a good analysis--there are levels of discretionary spending, and she's got a useful list of those second and third level discretionary items that have taken the biggest hit--and whose recovery will be an early sign of a more general recovery.

But I think she's missed the really big story:

What used to be an afterthought, from ordering wine with dinner to jetting off on a resort vacation, still feels like a splurge. No one knows when consumers will feel financially secure enough to return to old spending patterns.

Because, see, the "old spending patterns" were never sustainable. They were based on an economy of cash-out refinancing in a world where the value of people's houses only went up. If the value of your house went up by $70,000 every year, you could just refinance annually, take out the $70,000, and live off the rising value of your house. In that world, owning a house was an alternative to having a job. But that was always an illusion. That pattern is not going to return. And, without it, I don't think the "old spending patterns" of the housing-boom economy are going to return either.

In the new normal--in any real normal--something like "jetting off on a resort vacation" will always feel like a splurge, except to the truly wealthy. It is only in a fantasy economy--where we're all truly wealthy--that it doesn't.

It's just that we've had two fantasy economies in a row (the dotcom bubble and the housing bubble), so people are understandably unfamiliar with what normal looks like.

Here's a clue: In a normal economy, people have to live on less than what they earn and save up for what they want to buy. I look around and observe that we're starting to see those things happening again. That makes me think that what we've got now is starting to look a lot like a normal economy.

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Guest's picture

Good points in this article Philip.We can never go back to the "old" economy.The easy credit(and too much credit) of years past are hopefully,a memory at best.My grandfather still uses the phrase;"Use it Up, Wear it Out, Make it Do, or Do Without!"Not a bad philosophy to live by.


Guest's picture

"If the value of your house went up by $70,000 every year, you could just refinance annually, take out the $70,000, and live off the rising value of your house. In that world, owning a house was an alternative to having a job."

I've objected to the phrase "take out" money (from the house) because it did not signal the reality of greater debt. People who took that $70,000 would carry the debt service costs until they sold their house. $70,000 at %5 is what, $3500 per year? (Probably slightly different when adjusted for compound interest.)

So, "taking money out of the house" was a dangerous way to say it, doing far more to sell the debt for the lender than in any way helping the buyer.

Philip Brewer's picture

@ odograph:

Right--the debt service is exactly what made the whole "taking money out of the house" thing a fantasy.

On top of that, though, was a whole second layer of delusion.  If you pointed out the debt service issue, a lot of people would just wave that objection away:  "Worst case I can always sell the house and pay off the mortgage."  We're now seeing the real "worst case" being played out in our neighborhoods.  At least, I hope it doesn't get any worse.

Guest's picture

You said it perfectly: "In a normal economy, people have to live on less than what they earn and save up for what they want to buy."

I find that the less money I have, the more happy I am. It is only then that you realize the true treasures in your life: spending time with the family, long walks with your dog, and making a marvelous meal for your wedding anniversary instead of going out to dinner.

Splurges are great but when they are every day, they are no longer splurges.

Guest's picture

Another great post, Philip! The real question now is: how will "full" employment be defined? I am guessing a return to the 5-6% unemployment rate to account for the long-term fallout of a decrease in housing related employment as well as those jobs supported by the "second and third level discretionary items".

Philip Brewer's picture

@ Brian:

Yeah, I don't have the answers for employment.  Just look around and you can see that there's plenty of work to do--globalization, quality improvements, and an economy built around cheap replacements have gone together to eliminate a lot of low-value occupations completely.  I really don't know how that's going to play out.

Guest's picture

I will remember the Zero decade, the one that emerged post 9/11, as a sleeping in reverse. It started as a series of nightmares, geopolitical and economic drowsiness, excesses of consumption, and ends in sobriety, normality.

I would be delighted to be awake, sober and living below my means for the foreseeable future.

Guest's picture

I don’t think consumer confidence is well enough to begin splurging on things, especially housing. It’s still a struggle to make ends meet for many Americans and with increasing debt it’s harder to have good credit, let alone get financing for a new house. I think the projections that the housing market has hit bottom and things should appear optimistic is based on the coastal metro areas, especially LA where housing costs have lowered and people have that higher disposable income. Not researched, just my theory. See what you think about this video:

Guest's picture

Yes, it is the job thing that worries me. People are still loosing jobs at an alarming rate and there are still those who have been looking for 6+ months and they have not found anything. I have been trying to supplement my income and I am middle management. I can't get the jobs I am qualified for and they wont' hire me for retail or similar work because I am over qualified.

Without jobs, people can't spend discretionary or not.

Guest's picture

Americans have been working longer hours than workers in other industrialized nations for quite some time. What if wage earners cut down to a 40 hour work week, freeing up their extra 20 hours of labor for someone else to be employed? It's hard to do now because benefits are such a high cost to employers, but if we moved to a single payer health care system, the cost of benefits would not fall on employers. Would that allow employers and employees to shift from overwork to just the right amount of work?

Guest's picture

Is spot on. I've worked with enough moms of young kids to know that if they could have health care for their families, lots of them wouldn't work. It seems like there are a lot of families where the men make decent money as self-employed or commission-only workers, but don't get benefits, so their wives get boring, low-paid cubicle jobs with health care benefits.

Ditto older people who would like to retire, but aren't old enough for Medicaid - my parents worked a few extra years until they qualified for the pensioners health insurance, when they would have just as soon retired at 58 and could afford to, aside from health costs.

A lot of people who don't have little kids and aren't old would strike out on their own as entrepreneurs, too.

Philip Brewer's picture

Employment issues are complex. Right at the beginning of our current recession, I wrote a couple of posts on how employment has changed.  Because of when they were written, they don't reflect the things we've learned in the past year.  Still, they might be interesting to people who are already thinking about these issues:

Guest's picture
Matt Jabs

This is one of the better explanations I have heard for why the current frugality trend is here to stay... because the frugality trend IS normal, not the spending trends of recent years.

Excellent Phillip.

Guest's picture

Matt & Philip --

I definitely think we will go back to a pre-1990s spending rate. Whether I would call that "frugality" is questionable, though.

In re: to the 8% spending rate everyone is shocked over... it's a joke. As you go over in this post, Philip, all one needs to do is look at equity extraction rates over the last 15 years. Compare that to the savings rate. (They are inverse)

People were being told "your house won't lose value! we have the best economy in the world... the stock market will keep going up!" Because they bought into these (laughable) conjectures, they saved less and treated their equities as semi-liquid savings. It's easy to get pulled into the hype so I don't really blame them. They were being told this is the "new economy" and to have "faith in capitalism."

Now that people have seen both bubbles pop, they have been shocked back into the reality that houses are assets that appreciate, but not at the unsustainable rates they were appreciating at. And stocks gain value. But they can not grow at 10-20% every year when the company is actually only growing at 5%.

Good post.


Guest's picture

In the new normal--in any real normal--something like "jetting off on a resort vacation" will always feel like a splurge

And that's not a bad thing. IMHO, life is actually richer that way.