According to analysis of survey data by Goldman Sachs, the number of people who believe they will bring home more money one year from now is at its lowest in 25 years. Jan Hatzius, a Goldman economist, analyzed data from a University of Michigan and Thomson Reuters poll, which asks consumers whether they believe their family income will rise more than inflation in the next 12 months. Hatzius found that wage pessimism is at its lowest in more than two decades.
This pessimism in earning more income could lead people to save more of their money (which I think is a good thing). However, when spending goes down it leads to job loss in the retail section which could lead to another recession.
I find studies like this to be interesting because they show us in a somewhat easy-to-understand format how we (America) got into this financial mess. Let’s go back in time five years to 2006. Home prices were on the rise, people were not saving any money (in fact, Americans had a savings rate of negative 1% which was the lowest at that point in time since 1933), yet the economy was thought to be in great shape.
This was such an interesting time in our country. I especially remember how inflated home prices were. At that point in time, Tracy and I lived in Florida. After teaching in Poland for two years, we moved back home and bought our house there in the summer of 2002 for $89,000. By the time 2006 rolled around it was “worth” almost $200,000. For Sale signs littered almost every street in our city with people looking to sell and buy a bigger house. I remember thinking how ridiculous this was. If Tracy and I had been a few years late moving back home, we would have been out of luck. You could not find a house selling for under $150,000. Tracy and I were both teachers and did not make large salaries. I thought about other teachers and lower-income earners (police officers, social workers, etc.) and wondered how they could afford to live in our city. I guess we now know why ARM’s (Adjustable Rate Mortgages) became so popular – these loans allowed many to live in a house they wanted to even though they could not really afford it.
Fast forward to today. The housing market is a mess – home prices are down 33% since the first quarter of 2006, we are in line for another recession (depending on what expert you listen to) and unemployment is up. Despite such bad news, the savings rate is above 5%. I know times are tough for many but I would say that for a lot of these people, times were tough 5 years ago but they ignored the signs. So now, when many are saving as much as possible and not buying any toy they want, the economy suffers and we hear all of the negative news. One of the reasons we are in this mess is because of the way people handled money in the past when times were “good.”
Many have realized that they will not get a raise every year and their house will not automatically go up in value which has caused them to put money aside instead of spending all they have coming in. With consumer confidence being so low, we might be in this predicament for some time. When people don’t have confidence in the economy, they do not spend or take risks – actions that will get us out of this mess.
Photo credit: KJGarbutt
