Karabell On The New Unemployment Figures

As the equity markets take another huge step down, it's assumed that American consumers are so shell shocked by their loss of wealth in both homes and stocks that they will continue to hoard what little cash they have. Yet the relentless negativity about the state of the American consumer may well be overblown. Consumers didn't begin this crisis, but they may very well end it.

It doesn't seem that way right now. In a spate of polls in recent weeks, somewhere between half and two thirds of all Americans say that they are worried that they will lose their jobs. That fear seems to gain more traction with each passing month, especially with payrolls shrinking as rapidly as they did this month, with 651,000 jobs lost and the unemployment rate spiking to 8.1 percent. And as more people fear for the economic future, they have continued to pare their spending, which has in turn deepened the economic downturn.

The fear is real, but is it merited? For starters, it's worth noting that unemployment figures always lag behind economic recovery. No one knows how many more jobs will be lost, but even the most pessimistic estimates assume unemployment will top out at 10.5 percent. Let's say it gets worse and goes to 12 percent, which would mean about 5 million more jobs lost. It's a big number, but that is out of a workforce of about 155 million people in a country with 300 million people. Even if 5 percent more will lose their jobs, surveys shows that more than 50 percent fear that they will. Clearly there is a wide gap between fear and reality.

How much one worries is subjective. If I told you that there was a 1-in-20 chance of something bad happening to you, would you radically alter your behavior to account for that? That is precisely what is happening, and it is having both short-negative and long-term positive consequences.

The most obvious consequence is that consumers are saving, rapidly. Personal savings jumped from under zero in the middle of 2008 to 3.9 percent in December to 5 percent in January— almost equal to the 30 year average of 5.6 percent. Critics were quick to point out that some of the increase was due not to frugality but lower tax payments and higher Social Security payments. While there are problems with how the personal-savings rate (not to mention the unemployment rate) is calculated, there's little doubt that people have been socking away money and paying down debt. Outstanding credit-card debt has been decreasing for the past two months at least, and plunging auto sales are partly attributable to the unwillingness of many to incur new auto loans. Clearly, consumers are already rebuilding their own balance sheets.

Not only has disposable income been rising, but consumer-spending power has been boosted by lower energy prices and zero inflation. And as retail and real-estate prices fall, every dollar earned can now purchase a larger array of goods and services.

Bears say that these are blips compared to recent wealth destruction. The sky-high price of homes and stocks more than compensated for paltry savings in boom times, and somewhat higher savings now hardly compensate for plummeting personal wealth. Yet having a home go down in price, even if it goes below the sale price, doesn't usually change your monthly costs. If you bought a home for $300,000 and have a fixed-rate mortgage and now the home is worth $250,000, you may feel poorer but your payments haven't changed, nor has your income—unless you've lost your job or been hit by catastrophic health-care costs.

No doubt, people are scared and spending less, but the outlook for consumption going forward is substantially better. Investors and Washington are deeply concerned about a wave of credit-card defaults yet to come, but the vast majority of people remain current on the cards—and on their mortgages—and have income to sustain them. J.P. Morgan recently wrote off $3 billion of its $184 billion in Chase credit-cards loans, which is 1.6 percent of its loans. That got all the news, but it's equally true that 98.4 percent of loans are still good.

As the rate of job losses levels off, so too will the fear of job loss, which in turn will give people more room to assess their finances. They will begin to spend modestly and consistently, and spend the incomes they have, using revolving credit to augment their salaries. In spite of an ugly job report, there are signs that the rate of deterioration has stabilized, which is a necessary first step toward a slow recovery. For fear to abate, all that is needed is a less perceived threat of loss.

Most Americans are in better shape than most of Wall Street. Main Street enjoyed fewer of the bubble's benefits, but its residents are better positioned to dust themselves off and move forward. Looking to Wall Street to lead the recovery is ludicrous; its confidence is shattered and its balance sheets wrecked. Even looking to Wall Street to identify the recovery is too much; its analysts are shell shocked and legitimately fearful for their employment. This time, markets may lag the recovery. Real economic activity, and the steady spending of Main Street will lead the way.

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