Next, A Vicious New Year’s Hangover

Forecasters who believe that a 5% GDP improvement year was just around the corner in 2011 where disappointed by the new S&P/Case-Shiller data.” The Home Price Indices” showed a deceleration  in the annual growth rates in 18 of the 20 MSAs and the 10- and 20-City Composites in October compared to what was reported for September 2010. The most remarkable thing about the announcement was S&P’s public proclamation of how bad the future would be. “The double-dip is almost here, as six cities set new lows for the period since the 2006 peaks. There is no good news in October’s report.  Home prices across the country continue to fall.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.

 
The day was made even more difficult for economists who have hoped for the best. The Conference Board Consumer Confidence Index, which had improved in November, decreased slightly in December. The Index now stands at 52.5 (1985=100), down from 54.3 in November.

 
The consensus estimates for each set of data were much higher than the actual numbers.

 
The information for Case-Schiller and the Confidence Index were collected in advance of the euphoria that overwhelmed most shoppers. This enthusiasm helped move retail sales higher by an unexpectedly strong 5%. E-commerce improvements were better and may have been as much as 15% better than holiday sales in 2009.

 
The retail sales improvement now seems to be an aberration and not part of an improving economic trend. Americans have had such a hard time the last two holiday seasons that they wanted to believe the news that the recession was over. Consumers spent as if next year would bring more jobs and higher wages. Higher fuel bills, stagnant compensation, and persistent high unemployment are the reality of what will greet Americans in 2011. There are hardly any signs to the contrary.

 
The money that was spent during the holidays will have to be paid back in the first quarter of 2011. This did not seem so unmanageable when shoppers decided that the money they had saved over the last two years, or the credit card balances which had been paid down would be enough to cover a more lavish holiday than the ones in 2008 and 2009.

 
The first quarter of 2011 will be worse, economically, than expected. Many consumers will have difficulty paying off the bills they incurred while shopping. That means consumer spending will be lower in the first quarter and perhaps first half  of the New Year.

 
The economic forecasts for early 2011 were affected positively by the extension of the Bush tax cuts. Individuals and businesses will have more money than expected. Now, this money will be used for savings and debt reduction the same way that money was used during the worst quarters of the recession. Consumer spending will look the way it did eighteen months ago. Economists may still espouse the possibility that there will be a January miracle, with the major impetus being an unexpected tax windfall. The idea that giving people money that they cannot afford to spend should be good for the economy is not a new idea.  That does not make it any more plausible.

Douglas A. McIntyre