Consumers Are Better Off Than You Think

As the equity markets take another huge step downward, it's likely that American consumers will continue to be shellshocked by their loss of wealth in both homes and stocks. Yet the relentless negativity about the state of the American consumer may well be overblown. Consumers didn't begin this crisis, but they could 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 in March, 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 135 million people in a country with 300 million people. Even if 5 percent more will lose their jobs, surveys show that more than 50 percent fear that they will.

The most obvious consequence is that personal savings jumped from under zero in the middle of 2008 to 5 percent in January. 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. Consumers are already rebuilding their own balance sheets.

In addition, consumer spending power has been boosted by lower energy prices and zero inflation. And as retail stores across the country slash prices to attract customers and as homes decline in price, every dollar earned can now purchase an ever-larger array of goods and services.

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 while those will certainly tick up with unemployment, the vast majority of people remain current on their cards—and on their mortgages. JPMorgan, for instance, recently wrote off $3 billion of its $184 billion in Chase credit-card 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 in good shape.

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 (if they haven't already), 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 slowed, which is a necessary first step toward a slow recovery. It will be some time before hiring returns, but for fear to abate, all that is needed is less perceived threat of loss.

Main Street enjoyed fewer of the bubble's benefits than Wall Street did, 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 are in turmoil. Even looking to Wall Street to identify the recovery is asking too much; its analysts are hysterical and they are legitimately fearful for their future employment. That means this time markets may lag behind the recovery. Instead, real economic activity, and the steady, gradual spending recovery of Main Street will lead the way.