Remember that old chestnut about how it’s a recession when your neighbour loses his job and it’s a depression when YOU lose yours?

Well, research carried out by Datamonitor suggests a similar divergence between British consumer perception and behaviour during the current economic downturn.

The survey found that 90 percent of UK consumers believed that the country was in the grip of recession but slightly over half of them (53 percent) said their household finances have either improved or stayed the same. Similarly, twice as many people feel their job is safe as those who have actually lost or fear they will lose their jobs.

“In the majority of households there does not appear to have been any significant increase in financial strain that results in consumers displaying recessionary behavior,”

“On the contrary, only 8 percent globally think that their household’s general financial situation has worsened significantly since before the downturn, and thousands have actually benefitted from reduced mortgage repayments, for example.”

Datamonitor said the UK could be in the grip of a “psychological recession”, adding that the term was not meant to trivialise the economic contraction but to illustrate that the knee-jerk psychological reactions of consumers to the threat of recession were “primarily responsible for the perpetuation of the recession.”

Its solution is to…well, look on the bright side.

“The communication of positive messages through the government, the media and the banking industry is what is needed to facilitate a psychological shift and confidence boost amongst consumers, bringing about a ‘Psychological Recovery.”

(An earlier version of this post incorrectly said that Friends Provident had commissioned the Datamonitor survey)

Buy now, pay later was the mantra of U.S. consumers during a debt-fueled binge earlier this decade.

Banc of America Securities-Merrill Lynch economists think getting U.S. household debt-to-income back to the long-term trend will require eliminating $1.75 trillion in debt, assuming no change in disposable income. That will probably take years.

And that’s their more conservative forecast, just taking the ratio from its current level of 131 percent down to 115 percent. To get back to the average seen in the 1990s, $4.35 trillion in debt would have to be eliminated. 

 ”Either way you look at it, U.S.  households will remain mired in a period of balance sheet repair,” the economists wrote in a note to clients. “And, the continued debt elimination necessary to reach a more sustainable household balance sheet means that the ability of the U.S. consumer to lead the recovery on a sustained basis will be limited. This is why we do not expect the consumer to lead the economy out of the recession. This is also one of the risks to the view that th U.S. economy is on the verge of a V-shaped recovery.”

Johns Hopkins University economist Christopher Carroll thinks U.S. consumers have finally got religion when it comes to saving, after years of free spending. For the sake of the broader economy, he is hoping they take to heart the prayer of Saint Augustine.

Carroll, a leading scholar on how housing wealth boosted U.S. consumer spending, has a new paper out on how the financial crisis of the past two years has affected attitudes toward spending and saving. It isn’t pretty.    

 

“Our view is that American consumers are not merely resting from their former role as the world’s champion consumers, they are permanently reforming their spending patterns, in response to the end of the period of ever-more-available credit that fueled the unsustainably high spending of recent years.”

In other words, Carroll thinks spending will be weaker than most economists expect in the short term. The savings rate, which briefly turned negative during the height of the credit boom, will probably go back to the levels seen in the 1970s, when households routinely socked away 8 to 10 cents out of every dollar.

That would certainly put Americans on more sound financial footing, but a rapid rise in savings means a swfit drop in spending, and that is the last thing the U.S. and global economy need right now. That’s where Saint Augustine comes in.

“After so much lamentation about low saving, it may be a bit hard for the
public to stomach economists’ new worries about a drop in spending,” Carroll writes. “But the contradiction can be understood by analogy to the prayer of Saint Augustine, who after a youth spent in debauchery decided to convert to Christianity to preserve his mortal soul. He was still enjoying his sinful ways when he made that fateful decision, so his first prayer was ‘Lord, make me chaste – but not quite yet.’”

An Ipsos/Reuters poll of 23 countries found that cuts in household spending have remained constant during the past six months with entertainment, vacations and luxury items the first to go for nearly three quarters of families, followed by clothing, energy consumption and gasoline/driving.

The 23 countries polled,  including the United States, Canada, Brazil, Germany, Britain, Sweden, China and Japan, make up 75 percent of the world’s gross domestic product.

Where are you cutting back on spending?

Getting the U.S. consumer spending again is simple. “The government should issue every household with a debit card with an expiration limit of 90 days, and if they don’t use it, they lose it,” says Paul Kasriel, chief economist of Chicago-based Northern Trust.

Kasriel has a reputation of being more pessimistic than the consensus, but given the programmes unveiled to date by the U.S. Treasury, he believes the U.S. economy will start to recover this year. “The Federal Reserve, like other central banks, is a legal counterfeiter, and they can create money out of thin air,” he says, pointing to the TALF, and son-of-TARP, the inelegantly named PPIP.

Under the terms of the Term Asset-Backed Securities Loan Facility, the Fed will provide financing for firms to purchase asset-backed securities of credit cards, auto loans and student loans, whilst accepting most of the credit risk. Kasriel says this $1 trillion programme has gotten off to a slow start, but he believes it will gain momentum over the next few months and will play a key role in kick-starting the credit markets.

PPIP, or the Public-Private Investment Plan, has been designed to help banks remove toxic assets from their balance sheets, but there is a question mark over how many banks will actually want to take additional write downs. Kasriel says the bulk of these assets at U.S. banks haven’t been written down yet.

Indeed, banks have resisted write downs by arguing that the lack of liquidity for these assets has made it difficult to mark to market. However, the PPIP will finally establish a price for these toxic assets, forcing write downs. “That will leave some institutions inadequately capitalised,” Kasriel points out.

As a result he sees more mergers, capital raisings in the market, or a kind of nationalisation ‘lite’. “There was a line in Obama’s budget that $750 billion had been allocated to bank recapitalisation - I think that’s the ultimate plan,” Kasriel says.

Although Kasriel sees inflation returning in 2011 as a result of all this spending, he sees US exports becoming a larger proportion of GDP, as developing nations start to spend and the world economy rebalances. He tips healthcare, agricultural products, green technology and engineering expertise for infrastructure projects as the sectors most likely to benefit.

(Reuters photo: Benoit Tessier)

Europe’s leaders can no longer rely on the argument that German resilience will cushion the blow to the continent from the worst global recession in just about anyone’s living memory.

Germany’s economy, Europe’s largest, is now officially confirmed as the basket case of Europe, thanks to a plunge in demand for high-tech goods, stagnant domestic demand, and a strong currency.

Having shrunk by 2.1 percent in the fourth quarter alone compared with 1.5 percent for the 16-member euro area, Germany will hold for a brief period over the weekend the dubious title of the fastest contracting economy in the developed world.

That is, until Japanese GDP data are published on Monday.

Trading floors in Tokyo must be bracing for a very ugly morning indeed. Already expected to shrink by 3.1 percent on the quarter — or a staggering 11.7 percent if stretched over an entire year — the risks are high that the hole in the world’s second largest economy turns out to be even bigger.

Pioneer’s decision on Thursday to cut 10,000 jobs and exit the business of manufacturing flat-screen televisions was an ominous sign of just how quickly world demand is falling away for the high-tech manufactured goods that have made Germany and Japan famous.

And there is little reason to believe that with unemployment soaring across the globe, that demand will rebound any time soon.

German and Japanese policymakers gathering in Rome for the G7 finance ministers’ and central bankers meeting must be very worried that if there is no respite soon for the euro or yen, it will take a very long time to recover from this downturn.

We knew U.S. consumers were retrenching, but today’s December retail sales figures from the Commerce Department show that households were cutting back even more than economists had thought. That suggests no end in sight for a U.S. recession already in its second year.

The headline number was bad enough, down 2.7 percent, which was more than double the decline that economists polled by Reuters had predicted. A lot of that had to do with the well-documented problems with U.S. auto makers, as well as falling oil prices which pushed down sales at gasoline stations.

But even if you strip out autos and gasoline, retail sales were down 1.5 percent last month, the biggest drop since September 2001 — a month when many Americans stayed away from shopping centers for fear of attack in the days after September 11.

“There were 1 percent-plus declines in most (retail) sectors, confirming that the holiday season was truly disastrous,” says Ian Shepherdson, chief U.S. economist at High Frequency Economics. “Surely the first quarter can’t be as bad?”

Reuters photo by Brian Snyder

Maybe, just maybe.

While it’s way too soon to sound the all clear, analysts see some cause for optimism behind the latest government effort to restore credit markets to working order. All it took was another $800 billion.

It’s no quick fix, but by backing consumer lending, the U.S. Federal Reserve and Treasury Department are concentrating on the most important segment of the U.S. economy. Gary Balter, a retail sector analyst with Credit Suisse, summed up his assessment in a one-word headline: “Finally.”

“The steps being taken today may slow the bleeding but more job losses will occur into next year. We do not see an escape from that. However, what has changed on the margin in the last two days is that the government is doing what needs to be done to unfreeze the credit markets, which points to hope and a potential bottom to the economic issues in 2009. As we show inside and is well known, there is a very high correlation of consumer spending with availability of credit.”

(More analyst comments are here.)

Not that we needed another reminder of how bad things are, but Tuesday’s gross domestic product figures showed just how sharply consumers have pulled back. Consumer spending fell 3.7 percent in the third quarter, further than initially reported and the biggest drop in 28 years. Economists predict at least two, possibly three more quarters of declining GDP, but perhaps now the recovery will be more robust.

How’s this for a merry little Christmas?

Before the U.S. holiday shopping season even begins, Morgan Stanley’s chief U.S. economist has given up on consumer spending — not only through Christmas ‘08 but all the way until next summer at the earliest.

“As we see it, the current collapse in consumer spending likely will be the most severe and longest in the postwar (World War Two) period,” economist Richard Berner wrote in a note to clients. ”The recovery in consumer spending likely will be moderate as consumers embark on a long period of rebuilding thrift.

Why so grim? Well, between the 1.2 million jobs lost since the beginning of the year and the downdraft in the housing and stock markets, income is taking a hit and household wealth is down about $7 trillion. Yes, trillion with a ‘T.’ Oh yeah, and there’s that credit crunch.

Berner calls this the “perfect consumer storm” and says it will rage until mid-2009.

Now that you’re thoroughly depressed, we should mention the silver lining. The drop in gasoline prices to $2.45 per gallon from $4 represents $225 billion in consumers’ pockets. Add in another round of fiscal stimulus and it should limit — though not offset — the other strains on the system.

“Done right, and coupled with other policies to mitigate the credit crunch and foreclosures, these steps should promote a modest recovery beginning in 2010,” Berner said.