Here is a new fact of life: America’s economy is getting a little smaller. This “shrinkage” is likely to be a secular — as opposed to a cyclical — sets of changes.

Out goes the conspicuous consumption of the 1990s and 2000s . . . Lean and green is in; Grotesque and self-indulgent are out. Downsize that McMansion! Replace the SUV with something fuel efficient! Save instead of consume!

This is much more than a philosophical view — its what all of the economic data over the past year has been practically screaming.

In terms of actual data, here is what the new, leaner American economy looks like:

Asset Deflation: Equity portfolios are on average down about 40%; Dividends are being slashed, stock repurchases canceled. Nationally, home prices are down 20-25%;

Consumer Spending: Down significantly, after the US had its worst Xmas in 40 years. Savings rate has turned positive; Conspicuous Consumption replaced with Conspicuous Conservation.

Retail Stores: Have been hard hit; Many chains are filing bankruptcy (Circuit City, Linens ‘n Things Sharper Image, Steve & Barry’s Tweeter, Mervyn’s); The survivors (Starbucks, Macy’s, Sears, Office Depot) are closing stores — some, as many as 10-20% or more of exiting stores. Retail shopping will emerge from the recession with a much smaller footprint than before;

Employment: 3.6 million jobs lost already, with anywhere from 1 to 4 million more to go; Real Unemployment hit a record this past month;

Finance & Wall Street: The Street has been hard hit — look for much smaller revenue, with staff cuts of 25-35%. The safest players? Those with green P&Ls, and/or substantial assets under management. In employment peril? Everyone else.

Autos: US auto sales have plunged; Annual Sales are down 37%, from a 15 million annual run rate to barely over 10 million.Its not just Detroit, either. Toyota, Honda, BMW, Lexus are all suffering;

University Endowments: The intellectual engine of America’s brain trust has just taken an enormous hit to the frontal lobe: Harvard, Yale, Stanford, others are down -25% plus over the past 6 months alone. The big endowments fund Professorships, grants, student scholarships, pure research. The loss will be deeply felt over ensuing decades.

Wages: US Wages have been punished by globailization, and have been stagnant over the past 10 years; Now, we are likely to see contractions in wages over the next 1-3 years;

Media: Cirucaltion at major newspapers are falling; Its likely that 50% of print Newspapers will be gone (or web only) in 5 years; Will Fox Business channel, which launched just at the peak of the Stock market in 2007, manage to survive this onslaught? Less than even money.

Pharmaceutical Industry: Huge R&D budget and staff cuts — 15 -20% — at several major pharmas (Pfizer’s huge research layoffs most recently) don’t bode well for new drug development and cures; Misallocated resources over the past decade, and lots of dead ends don’t help.

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What is the sum total of all this?  The US GDP will contract 4-6% 2008 Q4 – 2009 Q2; Down 1-3% for the second half 2009; And is possibly flat in 2010 –
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Back in 2001, we had forecast the US Economy could hit $15 Trillion  by 2010-11; That now gets pushed back to 2015-17 . . .

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “Downsizing America”

  1. Note: This is an updated (and linked) version of a speech I have been giving at conferences for about 6 months now . . .

  2. globaleyes says:

    If you want to understand today, it’s important to know what was happening BEFORE YOU WERE BORN.

  3. kmikev says:

    All excellent points, Barry. Hard to make any case for a secular bull market for the next 3-5 years…

  4. Depends upon how deeply oversold we get

  5. NovBear says:

    Thank you for pointing out the endowment shrinkage. I am a former academic who now works in the scientific instrumentation field and almost all of the private schools have implemented spending freezes. There is no hiring and no purchasing of expensive scientific instrumentation anywhere. What really gets me freaked out is that two senators (Collins and Nelson) from two of the most low-tech states have proposed cutting out the science spending in the stimulus package. This money could patch a huge hole in funding while the endowments try to get back on their feet. Science needs more effective advocacy now!

  6. dbowe says:

    Downsizing? Some corporate jargon loving monkies might describe it as right-sizing!

  7. Grindstone Financial says:

    Good argument for labeling this crisis as “The Great Regression”.

  8. TheReformedBroker says:

    nothing on corporate spending (commercial RE leases, IT budgets, travel, event sponsorship, benefits & perks)?

    I’m sure that rundown would provide an equally stark contrast with 2007 as the consumer pullback does

    great piece!

  9. Mike in Nola says:

    Who knows, maybe even IMF supervision. China calling for the West to get a dose of its own medicine.

    http://www.reuters.com/article/newsOne/idUSTRE5182F120090209

  10. Mike in Nola says:

    As Bill Gross is now saying, no need for any of this to happen: government just needs to support all those asset prices listed above to allow “time for healing.”

  11. Bruce N Tennessee says:

    Well, if wages will most likely decline the next 2-3 years (and who wants to look out farther than that?)..then I would seem to me, even if there is not a “depression” and this winds up as merely being finally defined as a particularly ugly, long recession, then why would stocks be a bargain? Can you pick which companies will be winners? Apparently even full time brokers cannot….

    Why Analysts Keep Telling Investors to Buy
    http://www.nytimes.com/2009/02/09/business/09analyst.html

    ~~~

    BR: That’s actually set to launch after 9am . . .

  12. John says:

    Regarding the Pharmaceutical Industry, this is an evil industry that adds to health care costs because they only sell unnecessary and overpriced products. Forget “new drug development and cures” — we don’t want those, especially from them.

    For everything else on the list, you are being way too negative because Obama our savior is here to rescue us.

  13. call me ahab says:

    amen- I have been thinking this was the right thing to do a few years back- a voluntary pullback from an unsustainable ever accelerating bacchanalia of consumption and spending- but I guess we had to do it the hard way

  14. ottovbvs says:

    BR:
    Back in 2001, we had forecast the US Economy could hit $15 Trillion by 2010-11; That now gets pushed back to 2015-17 . . .

    …It clearly slips back but not by 5-7 years in my judgement. On the broader philosophical front though I think you are right. The McMansion era is over along with five flat screen TV’s in one home (seriously I have a friend with this many), and all the other stuff. However, this just means that consumers will find other outlets for their desire to spend. I suspect travel, personal appearance, cosmetic surgery to benefit. I also think you’re underestimating the effect of demographics; by 2014 there will be another 6 or 7 million people in the country.

  15. noilifcram says:

    Has anyone given some thought about the current demographics in the U.S. and the rest of the industrialized world? Could the current crisis reflect the fact that Boomers are on the verge of retirement (though a very frugal one) and that they will invariably reduce their consumption?

  16. VennData says:

    Complaints about the GOP not picking up the offer of bi-partisanship are dead wrong. Some offerings in the House stimulus plan:

    Flag-burning furnaces

    Gay betrothal? Something old, something new …skip something borrowed

    Jobs for Fetuses

    The War on Drugs will pay for itself

    Family Competitiveness Initiative

    Spring Break Vouchers

    Faith-based 401(k)s

  17. hawleyl says:

    So, what do we really want? In a recent interview on Charlie Rose, Martin Wolf (Financial Times columnist) indicated we don’t really want a resumption of where we were before the current crisis developed:

    Consumers using credit to buy beyond their means.
    Consumers saving too little.
    Asset bubbles.
    Financial derivatives/high leverage.
    You name it.

    What should be the ultimate objectives of the stimulus package and how do we get there? I leave that to those with more economic training than I have. As an engineer I suggest that the most important thing to get started is to ask the right questions.

  18. Transor Z says:

    In the economic “malaise” period of the late 1970s, President Carter preached the gospel of economizing, reduced dependence on foreign oil, adjusting to a reined-in consumer lifestyle. Icon: an MIT professor riding a reclining bike to work.

    The “Reagan Revolution” of the 1980s preached the opposite: consumption is good, consumption is the engine that drives the economy, Americans are fundamentally entitled to their “pursuit of happiness.” Icon: Gordon Gecko, Miami Vice.

    As Globaleyes said above, to know where we are going we need to understand where we have been. Maybe Carter was just the wrong spokesperson for greater austerity at the wrong time. Maybe Americans are just too individualistic to be receptive to redefining lifestyle options.

    What seems elusive to me in all of this is the holy grail of what the “sustainable” or “real” components of GDP are across business cycles. There may be no such thing because reinvention is part of the American DNA. We adapt, improvise, and overcome in response to change. And nobody tells us how to live our lives.

  19. noilifcram Says:

    February 9th, 2009 at 9:27 am
    Has anyone given some thought about the current demographics in the U.S. and the rest of the industrialized world? Could the current crisis reflect the fact that Boomers are on the verge of retirement (though a very frugal one) and that they will invariably reduce their consumption?

    Reply:

    Very few economists acknowledge the truth of the demography. Japan’s economic performance over the last two decades could be easily and neatly explained by her demography–she is/has been reproducing at a less-than-replacement rate since the eighties, and because she is most insular, allowing very little immigration, her population is in decline and is commensurately aging.

    Ex-immigration in the US, the story is very similar, except that native-born populations have been barely (about 2.1 births per female) keeping up, which is somewhat better than Japan’s. Without immigration, the US population would be in virtual stasis. The same is true for the developed nations of Western Europe.

    Demography, IMO, is why this is a secular, as opposed to cyclical, down-turn. It is not as much a matter of economic imbalances caused by too easy and too much money/credit, although it is that also, but is a tectonic shift resulting from a stable or contracting population in an economic system dependent on consumption growth.

    Without population growth, there will be no lasting economic growth. For the environmentalists, this should come as an unexpected blessing. If you think humans are causing terrific damage to the environment and the climate, then fewer of them, and with aging-induced decline in activity of those that remain, should be the best prescription for reducing man’s impact on the environment. Of course, the reduction in greenhouse gases (e.g.) attendant to a decline in economic activity takes away much of their raison d’etre. They’ll have to find a new secular god to worship.

  20. bcasey says:

    @hawley1 “What should be the ultimate objectives of the stimulus package and how do we get there?”

    1. ) The end of Suburban sprawl. The model of rusted out central citys surrounded by green suburbs with perfectly manicured lawns, should be nixed in favor of denser central populations, with substantial mass transit in every major city. Green spaces should be designed into the city, This will dissuade the urge to have a house in the burbs with a perfectly manicured lawn, after working all day in a concrete jungle.

    2.) Self sufficient Energy use. Whether we tax gas to force it or give tax credits to encourage it. Every residence should have some sort of power capacity beyond the grid. The grid should be more robust,
    it is rather silly for every residence to have inverters and batterys in each house when one inverter on a pole could service multiple energy producing houses. Large scale energy storage could be a challenge, but not anything insurmountable. Insulation, furnace and window upgrades should be encouraged through substantial tax breaks.

    3.) Moratorium or a freeze on new home construction. I can’t believe it but I still see new homes going up.

    4.) Big superstores could lose their competitive edge to the local hardware and the small neighborhood grocer. Maybe happening already…

  21. ottovbvs says:

    The Curmudgeon Says

    They’ll have to find a new secular god to worship.

    These global warming deniers are a hoot. Believe it or not progress IS possible. Back in the early fifties the population of Britain was around 46 million and most of the major cities were blanketed in smog during the winter months. Now the population is about 65 million, they have about about ten times more cars and smog is a minor problem. You might also want to take a look at California and compare its smog in the sixties with today when pop and car ownership is far higher because of emission standards amongst other things. I’m afraid Curmudgeon and most of the other conservatives here convince me their basic philosophy is nihilism

    And on the population in the US front forecasts for 2050 range from about 390 million to 450 million…a and guess what…I’m going to bet our consumption of oil will be less than now!

  22. Darmah says:

    The generational effects of the pig-in-a-python boomer generation were discussed by several folks a few years ago, before the rest of the manure hit the fan. And the forecasts were all for much lower growth than had been experienced.

    I’m not sure who these commentators were — I think Gross was one. But I found them all through the Big Picture. The only thing not making that scenario as bad as Japan or forecast for other areas was our population growth through immigration. So just another squall to add to the perfect storm.

    BTW, I’ve compiled a list of my favorite solutions:
    1) Nationalize the banks
    2) throw out current management and directors
    3) start a RICO investigation and seize all their effing assets and bonuses
    4) put all the bastards in Guantanamo

    Seems mild to me in comparison to what they did/are doing to us.

  23. flipspiceland says:

    “We’ll always have Paris”.

  24. Transor Z says:

    @bcasey:

    All laudable goals, but your comment reminds me of geodesic dome/Buckminster Fuller houses from the 70s. Where the US is nothing like the rest of the developed world is the degree to which we commercialize real estate, re-zone, change. Hamilton created The Grid for NYC and the whole damned country is a kind of RE grid system.

    The secular aspects of the economy are tied to national character. The U.S. will always be a proudly tacky spin-off of Europe.

  25. Mannwich says:

    Our new country slogan: “Deflation Fever: Catch it!”

  26. spigzone says:

    “Back in 2001, we had forecast the US Economy could hit $15 Trillion by 2010-11; That now gets pushed back to 2015-17 . . .”

    You might want to revise that … say … ‘We now forecast the US economy could hit $7 Trillion by 2015-17′.

    The IEA (International Energy Agency) verified fact that the 800 largest conventional oil producing fields in the world are CURRENTLY declining at a rate of 6% annually, and that rate will be steadily increasing says that the global economy will be SHRINKING for the foreseeable future.

    By the way that 6%/800 largest fields figure came from a very high priority very deep very thorough study by the IEA, released in Nov. 2008, upon being so directed by the Western Industrialized Countries, who set up and fund the IEA, following the cattle prod to the political anus that was the oil price spike into the stratosphere.

    Check this Feb. 4 article on the Arabian Business dot com website headed “Oil output could fall by 30m bpd by 2015 – Merrill (Lynch)”

    http://www.arabianbusiness.com/545723-oil-output-could-fall-by-30m-bpd-by-2015—

    It is certain that by 2015, whatever the precise number turns out to be, that there wil be a shortfall and it will be massive … and growing. By 2025 what? – 70% less oil from the peak, 80%?

    Can there be ANY doubt, given this situation, by 2015 the world will be in the throes of massive political and economic upheavals. Or there will remain such an animal as privately controlled fossil fuel resources. Or democracy will be edging toward extinction.

  27. Groty says:

    What I don’t hear being discussed much is the impact this new, scaled back American consumption will have on export driven economies.

    China is investing in CapEx during this downturn to stimulate its own economy. Much of it is public infrastrucutre, but presumably they are also expanding manufacturing capacity. They could find themselves with a gigunda amount of excess manufacturing capacity if the U.S. savings rate stays high or goes higher for a period measured in years, as I expect, as opposted to months.

  28. “And on the population in the US front forecasts for 2050 range from about 390 million to 450 million…a and guess what…I’m going to bet our consumption of oil will be less than now!”

    Population forecasts 40 years out are about as useful as climate models purporting to know what the weather will be a hundred years hence.

    That said, the US population will not grow at all unless: 1) immigration continues apace or picks up, and/or; 2) the native population starts having more children. That’s just simple math.

    Same is true for Japan, Great Britain, France, Germany, Norway, Sweden, South Korea and even China.

    But I’m not sure what any of this has to do w/ the consumption of oil, except perhaps oil is a proxy for economic growth? Or global warming? Don’t know.

    BTW, ad hominen attacks don’t add much, but in response to yours directed at me–skeptics (what global warming religionists call “deniers”) were/are the basis for the evolution for scientific truths. Einstein was skeptical that Newton had completely explained gravity. Galileo and Copernicus were skeptical that Aristotle and the Ptolemies had the movements and placement of the earth and heavens correct. Skepticism is the hallmark of rational understanding.

  29. spigzone says:

    ps. You understand that potential 2015 30ish mbpd shortfall is a PRODUCTION shortfall, not an available on the world market shortfall. THAT figure will be far far worse.

    Are you aware that in January Mexico relased the official 2008 production figures for their Cantarell field, the second largest oil field in the world, and in 2008 Cantarells production dropped by 45%?

    Yes, that’s a 45% drop in output in ONE YEAR.

    You know that old Chinese curse ‘may you live in interesting times’ … well the next decade is going to be positively fucking fascinating.

  30. DL says:

    “…the US Economy could hit $15 Trillion by … 2015-2017 “

    Yes, at least 2017, in inflation-adjusted terms.

    The U.S. share of the global economy will continue to shrink.

  31. zitidiamond says:

    Fox Business News has little chance of surviving. Fox has been outflanked on the right by CNBC. Palinism from Kudlow and Kernen has a more authoratative punch, than that delivered by the runway titters at Fox.

  32. tCA says:

    Barry,

    Bruce N Tennessee says, “Well, if wages will most likely decline the next 2-3 years (and who wants to look out farther than that?)..then I would seem to me, even if there is not a “depression” and this winds up as merely being finally defined as a particularly ugly, long recession, then why would stocks be a bargain?”

    I’d be curious to see a chart that shows a P/I ratio (S&P 500 price-to-personal income) over the years. In doing so, I’m thinking we can look through the earnings to see what was actually available to buy stuff. I get that the consumer doesn’t make up the entire economy, but I think there’s a story there- like Bruce’s point that stocks may not be that cheap to individual investors on a relative basis.

    tCA

  33. willid3 says:

    isn’t the down sizing of America just the logical conclusion of globalization? after all, if consumers (aka workers) fund 70% (or more) of the economy and they are all competing with workers in third world countries for work, then wages have to keep falling which causes the economy to shrink since there is nothing to inflate it any more . and since business hasn’t been investing in America of late, I am not really sure that the remaining 30% isn’t government. and if China and India don’t get busy and create their own consumer economies they will end up deflating faster than we do. and where that ends up is a highly likely hood of wars. as countries struggle to survive

  34. Winston Munn says:

    Without addressing falling wages, there can be no longterm economic fix.

    Here are two propositions.

    Shri Prabhat Ranjan Sarkar: “First, the foundation of prosperity is people’s purchasing power; second, rising inequality eventually destroys any economy. ”

    Alan Greenspan: “Company profits and labor productivity are the main engines of economic growth and prosperity. High profits generate high employment and high wages lead to joblessness. ”

    Whose ideas have been shown to be correct?

  35. AGG says:

    This from a Lawrence Lessig interview at Mother Jones:
    How do you phrase issues so that people begin to recognize that the issue that they’re most concerned about—whether it’s global warming, or health care, or safety in the workplace, or safe foods for their kids to eat—is at base also an issue about the kind of corruption that I am focused on. We’re thinking, how do you get people to have a refrain in their head: “It’s the money, stupid.” That’s the constant single thread that links these problems that people look at, and at a certain point, get people to recognize they’re just going to have to do something about this underlying problem. It’s hard. I just don’t accept the idea it’s impossible, which is what people typically infer from the common wisdom about process reform. Reform is possible, especially here, especially because so many people are so deeply convinced about the underlying predicate for that reform, namely that the system is corrupt.

    The thing that needs most downsizing is congressional greed.

  36. AGG says:

    The Pentagon is another outfit that desperately needs downsizing. They emplot 27,000 just for recruiting and PR.
    http://www.buzzflash.net/story.php?id=1001742

  37. DoctoRx says:

    Agree. Re SBUX- news out this PM: 1) price cuts and more bkfst products competing w MCD and 2) ST debt downgrade from S&P. Kind of puts an exclamation point on the end-of-an-era meme.

    (Typos and grammatical errors hurt yr image IMO.)

  38. RangerTurtle says:

    Great summary! Our recovery must be based on the U.S. returning to manufacturing what we consume. Continuing to rely on importing foreign oil, importing Chinese goods, Asians financing our imports, will lead us further downhill.

  39. VP1 says:

    Just wait until the 7 and 10 year ARMs are due on these overpriced homes… then we are really screwed….

  40. elleno says:

    An excellent insightful article (I think you are right, though I hope you are wrong).

    It seems that there is likely to be political fallout too. Regardless that the economic downsizing is politician independent Obama will bear the brunt of the electorates unhappiness when it becomes apparent that TARP and the other economic stimuli simply don’t deliver. Obama was elected on a platform of change a.k.a. improvement that will not come to pass.

    Also as America becomes weaker other countries will begin to assert themselves and make demands knowing full well that the US will simply not have the financial wherewithal to assert itself. China’s recent demand that the US subjects itself to IMF scrutiny is symptomatic of what is to come.

    Other characteristics of the downturn will be a shift in the US body politic. During hard times politics moves to the left, but social values move to the right so the Democrats should keep their hold on power, though coastal liberalism – gay rights etc – may wane.

    All in all not a pretty picture.