This week’s economic news including the following headlines:
- The US and China are going to Resume Trade Talks
- Job growth was Modest – shows the Economy Expanding but Slowly
- Fed Signals a Cut in Rates in Two Weeks
- Strength in U.S. Spending Drives Economy
Each of these leads was in the Wall Street Journal last week. The driving force in the economy is always Consumer Spending – and that continues to show strength. That sounds good at first blush – but it is misleading. The rise in Consumer spending is being fueled by increased consumer debt for credit cards and auto loans. The increase is not occurring because of significant wage growth and tax cuts to the middle class providing them more cash available to spend and to save for retirement. If that were the case – it would be good – because consumers would not be falling further into debt and would be saving for retirement.
Since the Great Recession, Corporate America has become more astute at maintaining profit – in order to preserve their stock market status. Before the recession, it was not uncommon for a business to be highly leveraged with debt – and overstaffed with employees. Not anymore. Amidst a massive tax cut and steady bullish economy, Corporate America has stashed up massive cash reserves and has been careful to keep overhead down – because they know – the key to riding out a slow down – is to maintain profits. The effect of this shift in policy has prolonged economic growth - albeit slow growth over many years – and delayed the economy hitting a recession
My concern, however, is for Joe and Jane, Fred and Sally and the rest of working class America. In the end, when the economy stalls – consumer spending will have stopped. But why will it stop? The answer is because the banking industry will pull back available credit – leaving no ability to spend. This will occur the moment the industry believes recession is imminent because they will try to avoid allowing consumers to increase debt if they believe the jobs that are needed to generate the money to make the monthly payments on the cards credit cards is evaporating. What is sad – is in the end, the same people suffer – the working Janes and Joes. Their jobs will disappear and overtime will be gone –and there will not be the money to continue to fuel paying on the consumer loans. Foreclosures will then rise and bankruptcies will increase – to get rid of the debt. Corporate America will not be hurt – because they stashed the necessary cash and have prepared for those losses.
It’s the Consumer who suffers. Ten years after the Great Recession – once again, the Consumer is without savings for retirement and when the credit evaporates – he will be without cash reserves to pay necessary living expenses. Sad as it is – it will mirror 2009 – 2012. For the Consumer – the lesson is forget the national economy and think of your economy. You can’t waste the income you earn by servicing credit card debt at 15% - 30% interest. You are wasting your future. You must get rid of that debt – and save money for retirement and slowdowns. In some respects – you need to do what Corporate America has done – stash cash and keep your overhead under control.
That’s my take. If you want to learn how to “stash the cash and keep your overhead under control” – I invite you to attend our FREE Seminar this Wednesday evening. Details are below. On top of that – Criminal Attorney Scott Weinberg – will present keys to addressing traffic offenses – something everyone needs to know!
Enjoy the football games. Go Lions!
