Consumers must defeat doubts to heal economy

By Edgar Ortiz

For the AJC

Celebrations that the recession is over with "spring shoots" popping up all over the economy may be premature. Growing unemployment and an anemic housing market tell us the economy faces a rocky road ahead. The recession will end when the wary and hesitant consumer regains confidence in the economy and starts spending again.

Fear, uncertainty and doubt are the major threats the economy faces today. While fears of a depression are waning, businesses and consumers are caught in a vicious "doubt embrace" that if not broken will continue to feed fear into the economy and prolong the recession. Consumers fearful for their jobs and uncertain about the future have curtailed spending, become frugal and increased their savings. Businesses facing declining demand continue shedding jobs. The combination of consumer fear and business caution means the economic recovery will be a slow one.

As consumers keep a tight lid on spending, fears are growing that the economy may endure a classic and prolonged consumer-led recession as hesitant consumers hold on to their paychecks and curtail spending, a reaction that exacerbates the cycle of doubts and hampers the odds of a prompt and healthy economic recovery.

Some of the doubts:

Rising unemployment creates uncertainty, and this leads to fear.

Fearful of the future, consumers curtail spending and increase savings.

Curtailed spending reduces demand and increases unemployment.

As more workers lose their jobs, more lose their homes and credit delinquencies soar.

Foreclosed properties flood the market, deflate prices and further erode home equity.

As bank losses increase, banks tighten credit standards and reduce lending.

Consumers and businesses need to break away from this circle of fear to bring an end to the longest and most severe recession in U.S. history.

What has happened:

GDP: The economy has contracted four straight quarters for the first time, making this recession the longest on record since World War II.

Unemployment: Rose to 9.5 percent in June, marking the worst job losses since the 1948-49 recession with more than 15 million Americans now out of work. Projections point toward a deteriorating job market with unemployment rates above 10 percent over the next 2 years.

Government deficits: Projected at $1.8 trillion in 2009, the biggest in U.S. history since the end of World War II, with additional deficits projected over the next 10 years.

Housing prices: Have fallen more than one-third since their peak values in 2006, destroying more than 41 percent of home equity ($5.1 trillion in losses).

Household wealth: The fastest rate of wealth erosion American households have experienced since the Great Depression.

With personal consumption accounting for more than 70 percent of the gross domestic product (the value of all goods and services produced by the economy), stimulating consumer spending is the most effective way to help pull the economy out of its current slump.

Each dollar consumers spend cascades through the economy. It generates increased demand for products and services, which contributes to increases in wages and benefits.

Re-energizing the economy with increased consumer spending is the surest way to generate growth and economic prosperity. Accomplishing this task requires new strategies and policies as the unsustainable economic conditions of the boom years have all evaporated.

The American consumer, whose ferocious consumption appetite fueled the growth of the global economy for more than a decade, today is wary, frugal and cautious.

The quick fixes of the boom years with skyrocketing home prices, growing household wealth, cheap credit, zero-down mortgages and lax lending standards are things of the past.

Although infusions of government stimulus funds have lessened the severity of the recession, government spending is not the solution as political decisions distort market efficiencies and contribute to deficits and the growth of the national debt.

The economy is not out of the woods, and any indication that the rate of economic decline is losing steam is welcome news.

The up side:

The economy shrank but less than expected.

Builders sit on sidelines waiting for inventory glut to subside.

The economy continues losing jobs but at a slower rate.

The American economy has faced great challenges and has risen to the occasion. The ingenuity, creativity and resilience of the American character are our best hope to bring the current economic slump to an end. It is time for consumers and businesses to let go of the deadly embrace of fear, hesitance and wariness.