Being in The Black is New Black -- Big Picture

 
   


By Kathleen Madigan 
 

        When I took over the Big Picture column in mid-2008, the financial markets were collapsing and the economy--while technically already in recession--fell off a cliff.
        As I leave it seven years later, the economic outlook is far better. Businesses are hiring. Consumers feel more confident in the economy. Federal Reserve officials are talking about trimming their ultra-accommodative policy stance instead of adding to it.
        While the recession has been gone for six years, its impacts linger. One of the biggest changes is the new frugality among consumers. Having been burned by layoffs, collapsing 401(k) accounts, plunging home values and stagnant wage growth, many households have decided saving is the way to go.
        Many consumers are living below their means because the future remains scary and uncertain. This shift is why most retailers didn't benefit from the steep drop in energy prices that began last year. "Shop til you drop" is so old fashioned. Being in the black is the New Black.
        In the long run, the U.S. economy and society will benefit from consumers, especially boomers, having a bigger financial cushion. In the short run, though, we are experiencing the paradox of thrift. That explains why this recovery has been the weakest in the postwar era. And it suggests growth will remain tepid in coming years, clobbering companies that depend on a vibrant (and spending) middle class.
        For the individual household, thrift is a good pursuit. We shouldn't live beyond our means and should have a rainy day fund. But as John Keynes noted, when everyone saves at once, it's a disaster for an economy. More savings means less aggregate demand. Less demand means businesses create fewer jobs, which tempers demand further. Total income falls, in turn reducing the total amount of savings.
        It's not all about new savings, of course. A large part of "living below our means" lies with younger adults who have to use part of their current salaries to pay off student loans. This is the population cohort that should be purchasing homes, buying new merchandise and spending on services--you know, all the stuff that pumps up economic growth.
        Much like the Great Depression made their grandparents wary about debt, the Great Recession has spawned a generation that isn't interested or able to indulge in spending sprees, who still live at home and who will most likely never live as well as their parents. The reluctance and inability to spend will keep U.S. economic growth at a subpar pace for quarters, if not years, to come.
        - This is the last Big Picture column on Dow Jones Newswires. Kathleen Madigan is leaving The Wall Street Journal in August.
        Kathleen Madigan, a special writer, is the primary author of the Big Picture column. She covered the economy for almost two decades at BusinessWeek and worked in the economics departments at several Wall Street firms.
        Write to Kathleen Madigan at kathleen.madigan@wsj.com
        (END) Dow Jones Newswires

        July 31, 2015 10:43 ET (14:43 GMT)

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