Contrary to the timeline suggested by the NBER, our data strongly suggests that the consumer portion of this recession did not start out to be about housing or damaged consumer balance sheets. But it is now. It has clearly evolved, and the average consumer's version of a recession diary might look something like this:
-- December, 2007: Spending slightly more than last year, sub-prime mess is somebody else's problem
-- May, 2008: Gas prices way up, banking crisis in the news -- maybe we need to be little cautious
-- August, 2008: Democratic National Convention says things really are getting different this time, maybe more caution is warranted
-- November, 2008: Good, the election's over, and gas prices are down -- things are getting normal again
-- March, 2009: The 401K may be hurting, but at least we have the house to retire on
-- June, 2009: Unemployment numbers don't look good, but those usually start back down
-- December, 2007: Spending slightly more than last year, sub-prime mess is somebody else's problem
-- May, 2008: Gas prices way up, banking crisis in the news -- maybe we need to be little cautious
-- August, 2008: Democratic National Convention says things really are getting different this time, maybe more caution is warranted
-- November, 2008: Good, the election's over, and gas prices are down -- things are getting normal again
-- March, 2009: The 401K may be hurting, but at least we have the house to retire on
-- June, 2009: Unemployment numbers don't look good, but those usually start back down
- August, 2009: A lot of vacant houses in the neighborhood, let's rethink retirement funding
-- January, 2010: Unemployment is getting worse, let's pay down our credit cards
-- May, 2010: There may be a recovery going on somewhere else, but it certainly ain't here
-- August, 2010: Politics are getting ugly again, things aren't about to improve anytime soon
There probably hasn't been two separate recessions in three years, simply one that has evolved in significant ways. But if this really is a "double dip" recession, then our data indicates that the "Great Recession" of 2008 was merely the precursor, and not the main event. It is this current dip that we should be really concerned about; the current contraction in consumer demand is about
structural changes in consumer behavior, whereas the "first dip" was about short term loss of consumer confidence.
This recession has been complex and constantly evolving in ways that policy makers have not been able to understand through their low resolution lenses. As a consequence their policy responses have been misguided, ineffective and wasteful. The Federal Reserve may be able to save the banking system by being the "lender of last resort", but it is powerless to change perhaps the one thing that John Maynard Keynes got right -- and what he mischaracterized as a "Paradox
of Thrift" -- as over 100 million U.S. households become economic "loose cannons", acting exclusively in their own best interests in 100 million different ways.
