How and When the Recession Will End

The Consumer Balance Index (CBI) signaled the start of the recession by dropping eight points from 95 in October 2007 to 87 in November. A deepening of the recession was then signaled when the CBI dropped another ten points, from 83 in September 2008 to 73 in October 2008.

The CBI tracks consumer ability to sustain their current level of spending by ascertaining the balance between their income plus assets versus debt plus spending obligations.  Declines in the CBI were co-incident with declines in the value of consumer assets – housing, common stocks, and other real and financial assets – damaging consumer ability to sustain their current rate of spending. 

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The question about how and when the recession will end is buried in the relation between consumer perception of their overall financial situation and the way they make spending decisions.

This recession has not affected all consumers uniformly.  The proportion of consumers with the “Strongest” financial balances has decreased, while the proportion with weaker financial balances has increased.

In pre-recession October 2007, when the CBI was 95 – indicating the economy was strong – 29% of consumers had the Strongest financial balances, while 9% had the Weakest balances. 

Fifteen months later in December 2008, with the CBI down 20 points to 75, only 13% of consumers had the Strongest financial balances – down from 29% in October 2007 – and the percent with the Weakest financial balances was up to 16% from 9% in October 2008.

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A decrease in the percent of consumers with the Strongest financial balances (CBI’S of 163) has a disproportionately negative effect on spending.  These households not only have the means but also the will to spend heavily.  Specifically, they tend to have higher incomes, more education, live in larger households, and have more workers per household than households with weaker financial balances. 

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DEMOGRAPHY OF HOUSEHOLDS BY CBI OCTOBER THROUGH DECEMBER 

The reduction in the proportion of consumers with the highest CBIs between October 2007 and 2008 has a disproportionately large depressing effect on spending, not only for day-to-day items – food, clothing, gasoline, medical services – but also for major goods: autos, housing, appliances, personal computers, and the six other major goods for which information is collected in the monthly surveys.

For food, clothing, and other day-to-day expenditures, the higher the household’s CBI the higher the percent of households that spend freely – that is, do not try to cut back on spending. 

For example, the percent spending freely on food declines progressively from 56% among households with the Strongest financial balances (CBI of 163) to 17% among households with the Weakest financial balances (CBI of 18).

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For new cars, used cars, housing, and seven other major products covered in the survey, a reduction in the percent of consumers with the Strongest financial balances has a devastating effect on total spending.

The percent of consumers planning to buy a new car declines progressively from 21% among consumers with a CBI of 163, the Strongest financial balance, to a low of 4% for consumers with the Weakest and Fourth Strongest financial balances.

Similarly, the higher the CBI the larger the percent of consumers planning to buy used cars, houses, furniture, personal computers, major appliances, carpeting, television, air travel, and hotel or motel stays.

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 … How the recession will end

The recession that began in November 2007 will end as consumers improve their financial balances – primarily by rebuilding their assets – and again feel able to sustain or increase their spending to levels that stimulate the production and sale of goods and services.

 …When the recession will end

Given history, this recession will end when the CBI rises toward 97 and the proportion of consumers with the Strongest financial balances increase to 29% of all consumers.

There is no sign in December 2008 that the recession is easing.  A majority of consumers (51%) continue to report in December that they are being hurt by the financial crisis, up from 44% in October.  The percent saying their incomes are not enough for them to live comfortably stands at 38%, up from 26% a year ago in December.

The November and December 2008 upticks in the CBI did not signal the start of an upward trend in the CBI.  Rather than recovering smartly from the ten-point September to October plunge, the CBI had a “dead cat bounce.”  The percent of consumers with the Strongest financial balances remained flat at 13% in October, November and December.

Consumers who own stock directly or in mutual or retirement funds are increasingly pessimistic about the prospects for a significant increase in value of common stock and, currently, are unlikely to put money into the market to support the prices of common stock.

Specifically, the ratio of prospective buyers of stock to sellers of stock in the event of a 10% decline in the Dow has diminished, from 1.90 buyers per seller in August, to 1.68 buyers per seller in September, to 1.08 buyers in October, to 0.90 buyers in November, and to 0.89 buyers in December.

The headline of this article promises to announce when the recession will end.  At this time, while a date certain cannot be stated, the author will provide on request, at no charge or obligation, monthly e-mail reports on the CBI and on the percent of consumers with the Strongest financial balances so that readers can track the easing of the recession and mark its end.

To receive free monthly reports on the CBI, click on leos8111@comcast.netand give your name and the e-mail address to which the report should be sent.

 

SOURCE OF INFORMATION Information for computing the CBI in this report comes from 7,680 consumers interviewed by phone at the rate of 480 consumers a month during the sixteen-month period starting September 2007 through December 2008.  Each sampled household reports whether their household‘s financial balance – the difference between their income plus assets versus their debt plus spending obligations – is improving, worsening or remaining constant. Data from monthly surveys are weighted to compute the CBI INDEX from the raw survey data. To secure monthly CBI readings, e-mail leos8111@comcast.net and request that the CBI data be forwarded to you by e-mail as soon as they become available.  There is no charge for this service.

Copyright December 2008 by Leo J. Shapiro – All Rights Reserved.