Some Old Stand-Bys No Longer Standing
WASHINGTON — The last two years made it very clear that you can't hold onto longstanding assumptions about economic or consumer behavior.
Some hard lessons and missed forecasts have led a number of economists to that conclusion, including CUNA Chief Economist Bill Hampel, who said the current economy has established that anything can happen. "It does not mean we can't see patterns and make assumptions. But understand that you will be less confident in your thinking that if A happens B follows. Now when A happens the thinking is B might follow."
One assumption the recent recession has proven false is that economic growth has enough pure momentum behind it that a severe recession can't occur. "Now we know this is not true, that the economy can get out of whack so quickly that we have a serious recession," Hampel said. "Our outlook now cannot be quite so optimistic-where we don't worry about really bad things occurring, just worry about things not being really good. That is no longer the case."
An obvious change in thinking now exists around mortgage backed securities. "Because of 70 years of behavior we came to the conclusion that next to treasury securities the safest investment was anything backed up by residential real estate in the U.S. That home prices may level, but never fall off."
Consumers, too, showed they are behaving differently, especially when it comes to assumptions around obligations they will pay first when times get tough. "The old thinking was that if a household gets into financial difficulty the last loan they quit paying is the mortgage. Now that is often reversed. Because my house is underwater and I lost my job I need my credit card to put gas in may car to find a new job. Take my house please, if you want it."
The notion that consumers aren't really savers, a view widely held before 2008, is changing, pointed out Bill Handel, VP of research and development for the Lombard, Ill.-based Raddon Financial Group. "For 40 years, from post World War II to the mid-1980s, the savings rate in the U.S. was consistently above 7%, averaging close to 8% to 9%. Then the rate began steadily declining, getting as low as 1% in 2007," said Handel, attributing a good portion of the drop to consumers saving through real estate. We are seeing the savings rate methodically climb and move into the 6% range."
CUNA Mutual Group Chief Economist Dave Colby said economic and consumer uncertainties brought about during the last two years make it much more difficult for businesses to make their own forecasts and take action. "Huge uncertainties in the minds of business are deferring this recovery. What is an employee going to cost me? What will my tax rate be? Am I going to be taxed? If I don't know what to expect, I do nothing."
Lastly, Hampel said the previous 24 months have lowered his faith in economists' forecasts. "I never had much confidence in economists' ability to predict the future, and now I have even less. We can talk about significant underlying trends and long-term forces. Therefore I can say, for instance, I am very confident the economy for the next five years will grow less than it did for most of the first century. And that is because I know the household sector balance sheet needs repairing and consumers will spend less. But I can't with certainty tell you if next year will be strong or weak."