In my previous two posts in this series, I looked first at past recessions and then at the glacial rate growth in jobs and household income even before the current crisis. To meet rising household expenses, Americans worked longer hours and reduced savings from 10% of income in the 1970s to nearly 0% today.

They also borrowed at an accelerating rate as low interest rates fueled housing prices and expanding home equity loans.

Here’s financial blogger Hale Stewart again:

Let’s look a bit deeper into the expansion.  Consumer spending makes up 70% of US GDP.  So for the economy to expand, people need to keep spending.  At the beginning of this expansion, the US was saving about 2% of their paychecks.  That means the US consumer was pretty much spending everything they made.  Although the US consumer kept spending for the duration of the expansion he didn’t see any increase in real income.  So – where did this extra money come from?

Massive amounts of consumer debt.  Notice the mammoth increase in consumer debt over the last 8 years.


According to Credit Slips, the fantastic blog on consumer credit and bankruptcy:

The debt service ratio estimates the proportion of after-tax income that families spend on mortgages and consumer debt.  That ratio rocked around 10-11% for the early 1980s, then it began to climb. Since the second half of 2005, despite record low interest rates, the ratio has remained above 14%.  That’s about a 30% increase in the amount of income consumed by debt payments alone.

The reason debt service has grown isn’t hard to figure out.  From 1990 to 2004 alone, Americans shifted from owing about 86.2% of a year’s disposable income to owing 105.1% of their disposable income.  We don’t have the numbers yet, but no one thinks the debt load shrank from 2004 to 2007.

An increase of three percentage points in the debt service ratio may not sound like much, but that’s an additional $3 taken out of every $100 of after-tax income just to make interest payments.  It has the same effect as taking a 3% pay cut.

Fast forward to January 2009. The housing bubble that floated all that home mortgage debt has burst; nearly one in six homeowners owe more on a mortgage than the home is worth. Credit card companies are tightening credit and raising rates.

Implications for business strategy:

  1. Federal economic stimulus will hopefully help the economy, but will not meaningfully improve stagnant household incomes.
  2. With household income flat, health care expenses rising at a double-digit rate, and severe new restraints on consumer borrowing, there will be powerful, downward pressure on consumer spending for a long, long time.
  3. Big ticket items including housing, education, health care, and transportation are likely to see dramatic changes in consumer behavior over time.
  4. Discretionary consumer spending will decrease, but will remain an outlet for meeting psychological needs.

In the fourth post in this series, I’ll discuss some of the non-consumer issues that should inform recession and post-recession strategies.

In my previous post, I reviewed the past five recessions to provide one backdrop for business strategy. In this post, I’ll discuss jobs and household income: two of the underlying issues that make our current crisis unlike past recessions.

We’re still in the storm, but we can already see some of the likely contours of the future business environment. Jobs and household income were increasing at glacial rates long before the crisis and ongoing downward pressure is anticipated. To the extent that the fitness of our individual enterprises is tied to a general “rising tide,” said tide is lifting fewer boats and not as high.

Like global warming, we frequently have a vague recognition of the trends in job and income growth but without scale or detail. Let’s take a look.

Job creation was a crisis before the recession
Last April, financial blogger Hale Stewart assembled a fact-filled critique of the recent economic expansion (2002-2007).  He included a version of this graph showing that expansions in the 1960s and 1970s grew jobs at about 3% per year. In the 1990s expansion, job growth dropped to 2% per year. Then, in the 2000s, job growth flat lined for 29 months before eking out an average 1% annual growth – not even enough to absorb the 1.25% annual growth in the labor force



Most people lost ground in the last economic expansion
Throughout the recent presidential campaign, we heard a growing angst about the plight of the middle class. The bottom line is that median household income, adjusted for inflation, has stopped rising. Stewart offers this Census graph with the comment: “Real median household income is now at the same level it was in 2001.”

Read more