Economic calamities result in changes in micro-economic
behavior which can last for years. My grandfather had accounts at eight
different banks, just in case seven of the banks failed; my grandmother
dutifully recycled her aluminum foil, 25 years after the Great Depression had
ended. People fear that bad times might return, which causes them to be
cautious for an extended time.
Likewise, the Great Recession (of course not nearly as traumatic
as the Depression) ended only eight years ago and continues to impact
micro-economic behavior and thus, macroeconomic performance. Exacerbating this
impact was the weak, inconsistent recovery which followed.
Businesses and consumers emerged from our recent calamity exhibiting
significant caution. Businesses witnessed customers and competitors getting
washed away in the economic tumult. Almost everyone knew someone who had
suffered a significant economic loss during this time. In recent, milder
recessions the economy snapped back, and this short-term caution was replaced
by renewed confidence, and economic behavior quickly reverted to pre-recession
norms.
However, that has not happened, as of yet, this time. When
you add in the cultural changes taking place due to the Millennials and new government
policies over the last several years, the economic behavior changes are
significant.
I initially resisted the idea of a “new normal” when this
was suggested by some economists a few years ago. I argued that it was more
like a “new abnormal,” which suggested that we would divert back to the “old
normal” at some point. However, this transitional period has lasted too long,
and too many factors have appeared for economic society to ever return to conditions
of the mid-oughts.
This recovery period has been characterized by over-cautiousness
and under-confidence. It is the Gopher Economy, with businesses and consumers
sticking their heads up to move forward, then diving back under the ground at
the first
The high cautiousness combined with cultural and
governmental factors have resulted in the following changes:
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Home ownership percentages remain lower. It is
much less risky to own a home than to rent. The recovery has not produced
enough high paying jobs. Add in student loan debt, and Millennials cannot
afford houses, are not getting married, not producing children, etc. These
factors are muffling the housing recovery, which is usually a main driver of
economic recovery.
-
Labor participation rates are down. The top end
of the demographic scale got hit with huge layoffs during the recession. Older,
displaced workers don’t have enough time to learn new skills, and they are much
less likely to move to where new jobs are available. Some workers entered
expanded disability programs, and some retired prematurely. On the other end,
many Millennials have entered the workforce at a much lower level than expected,
because the recovery has not produced ample opportunities. The government has
expanded the “safety net,” which decreases incentive to work. In addition, some
younger workers eschew manual labor positions, making it difficult for some
manufacturers to fill open jobs. Not having these older and younger people in
the workforce also hinders economic growth.
-
Millennials are less likely to own cars. Car
loans equal debt risk, and caution works against this. High student loan debt
and lower paying jobs limit the funds available for transportation. Uber and
ride-services limit the need. The DOT Miles Driven measurement lagged for an
extended period during the recovery, finally resuming a more normal growth rate
in 2014.
-
Unemployed workers are much less motivated to
move cross country to take jobs, because of the risk that the new job may also end.
Cautious workers stay put. However, many Millennials are moving into the
downtowns of large cities and saving money by sharing living expenses and reducing
transportation costs. Now some jobs are being moved into the cities to attract
these workers, so you actually have some jobs following the people, instead of
the other way around.
-
Small businesses have been very reluctant to
spend money on expansion or new equipment. The slow recovery and increased
regulations have held profits modest. The inconsistency of the recovery has
kept business owners cautious.
-
Banks have been more cautious in making loans.
Requirements have tightened.
-
This economy lacks risk takers, entrepreneurs,
new business start-ups, and new industries…the types of companies which create
jobs.
Impact on the Transportation Equipment Markets
The biggest impact of the Gopher Economy has been on
medium-duty work trucks, the types of vehicles used by many small service and
construction businesses to transport their equipment, materials, and supplies.
The market has grown modestly during the recovery, but much less than Class 8
trucks and trailers. Small businesses continue to manage their companies
cautiously, avoiding risk, just in case the recession returns.
In December, I wrote about the boost in consumer and
business confidence since the election. Many economists warned, at the time,
that this was more of an emotional reaction and this confidence would soon fade;
however, the opposite has occurred:
-
The Conference Board Consumer Confidence Index is
up another 7.7 points since November.
-
The University of Michigan Index of Consumer
Sentiment gained another 5.6 points from November.
-
The Gallup U.S. Economic Confidence Index jumps
to +16, 8 points higher than November.
-
The National Federation of Independent Business
is up 7.3 points since November, its highest level since 2004.
However, confidence surveys are traditionally unreliable
predictors of future action (i.e. actually spending money). Still, the large
increases in these indexes are hard to ignore. They would indicate the economy
could be moving from caution to confidence, and this has very positive
indications for future economic growth.
It took a world war to shock the economy out of its
stupor after the Great Depression. Did it take a landmark election to shake the
ground and cause this economy to emerge
from its hole and start moving again?
