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 and less confident 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 sign of economic distress.
The high cautiousness combined with cultural and governmental factors have resulted in the following changes:
– 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. They are also 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 still 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 may decrease incentives to work when the returns of service jobs are so low. In addition, some younger workers eschew manual labor positions, making it difficult for some employers 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 jumped 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, and now this economy seems confident enough to emerge from its hole and start moving again.