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.’”

Economist James Hamilton was pretty offended by the rough treatment of Federal Reserve Chairman Ben Bernanke last week at the hands of some U.S. politicians. But when he put up a defense of the Fed chief on his blog, he got an earful from readers who were critical of the U.S. central bank and suspicious over its role in the financial crisis and last year’s bank bailouts.

Some members of the House of Representatives Oversight Committee quizzing Bernanke last week voiced outrage over the Fed’s role in Bank of America’s takeover of Merrill Lynch. They claim the Fed covered up pressure on BofA to swallow massive Merrill losses in order to protect the wider economy.

Hamilton said they were trying to turn Bernanke into a scapegoat.

“These interrogations reveal more about those doing the grilling than they reveal about Bernanke,” Hamilton, an economics professor at the University of California, San Diego, wrote on his blog. “I see this as pure political theater, and I don’t like it.”

But some of his readers reckoned that the Fed chief, a former economics professor with whom Hamilton had corresponded in the past, is getting what he deserves.

“The question is not if the man is a good man. The question is, did he participate in a crime, the crime of knowingly help screw BOA shareholders out of millions?” argued one commentator. “I think he’d look good in orange. He can help the other inmates with their financial planning.”

What’s your take? Is Congress disrespecting Bernanke or did he have it coming?

Eighteen months into the worst recession in decades, and the pain of the downturn is reaching into nearly every U.S. state, city and municipality.

With ever more people out of work, consumer spending has dried up, depriving local government of sales tax revenue. The continued housing slump has wiped out real estate transfer taxes, while declining corporate profits have eroded business tax revenue.

From Maine to California, the slump has drained coffers at the very time that the cost of providing jobless benefits and healthcare has risen, straining public finances.

Over the coming week, Reuters.com will publish a series on the problems facing states and cities. From Aurora, Illinois, Karen Pierog reports on the hardship created by the closure of a shelter for battered women, a victim of the crisis in U.S. social services.

Nick Carey visited the town of Pontiac, Michigan, and reports on the desolation wrought by the bankruptcy of General Motors. From San Francisco, Jim Christie and Peter Henderson report on the ticking time bomb created by California’s fiscal crisis as the state Treasurer prepares IOUs for suppliers.

Tom Ryan in New York and Andrew Stern in Chicago outline the burden that extended jobless benefits are putting on the funds that states use to pay the unemployed. From Miami, Michael Connor reports on how U.S. ports are being battered by the stark drop in trade volumes, a direct result of the collapse in American consumer demand and global trade.

Municipalities around the country are cutting services, laying off staff, furloughing others, scaling back pension entitlements and raising fees on everything from parking to soda bottles to plastic bags and cellphone ringtones.

As many as 46 U.S. states are facing fiscal 2010 budget deficits totaling at least $130 billion, according to the Center on Budget and Policy Priorities.

That’s up from 42 states with mid-year shortfalls of a combined $60 billion in the current fiscal year, according to the Washington think-tank.

Stimulus funds are a help and without them, the fiscal stress would be a lot worse. But the programs devised by the Obama administration are not sufficient to plug the gap, leaving governors and mayors with no choice but to cut spending and raise taxes — unpopular measures at any time but especially unwelcome as many families are struggling to make ends meet.

Because state revenue tends to lag economic activity, things will get worse before they get better, according to S&P Chief Economist David Wyss. Municipalities are typically the last to feel an economic recovery.

Mayors from around the country last month called for direct aid to cities arguing that they have been short-changed by the stimulus program money. Like many federal initiatives, the stimulus program makes states the primary conduit for funds, and urban centers feel they are disadvantaged compared to rural areas that have greater political clout.

“The toughest part is cutting back on programs and services that people really want in their communities, and having to explain to them why we can’t do certain things any more because we just don’t have the money,” said Philadelphia Mayor Michael Nutter.

Read more on our special coverage page, Economy: U.S. State Budgets

This sounds awfully familiar. Oil prices have risen sharply from a March trough, while the U.S. dollar has fallen 10 percent against a basket of currencies. A bad 2008 flashback? Not quite.   

Riccardo Barbieri, head of international economics at Banc of America Securities-Merrill Lynch, says oil merits close watching to make sure it does not rise too far, too fast. For now, it does not pose an imminent threat to U.S. or global economic recovery.

 ”Our economists around the world feel that as long as oil prices did not rise significantly above $80 per barrel, that would not prevent an economic recovery in the second half of the year,” he wrote in a note to clients. “A further rise in oil prices would act as a tax on importing nations, and we would worry in particular about the U.S. consumer.”

A jump in oil prices would also be a headache for central bankers in the rich world because it would bring an unwelcome dose of inflation when the economy is too weak to handle an interest rate rise. If emerging markets stage a strong recovery, driving up oil demand and prices, the U.S. Federal Reserve and other central banks “may have to accommodate a rise in headline inflation, lest the economy fall into a dangerous double dip,” Barbieri said.

It's official: Japan's economy shrivelled at a record pace in the first quarter.

Needless to say the 4.0 percent contraction in GDP (an annual rate of 15.2 percent, if you speak American) from January to March was not pretty -- especially when you see that the pain has spread from Japan's big autos and tech factories to the broader economy.

Much has been written about Japan's heavy dependence on exports from its powerful manufacturers and how the slide in orders from the United States and Europe has forced factories to curb output, lay off staff and slash capital investment.

But that GDP figure is looking backwards to a time we know was bleak for the economy.

Just as the West is looking for signs of "green shoots" of new growth to see if the worst is over, so Japan is looking to see if its economy is now starting to sprout cherry blossoms -- the traditional sign of spring in this part of the world.

The good news is that companies are starting to see a tentative pick-up in sales.

A senior executive of Konica Minolta, which makes key parts for LCD TVs as well as its brand name photocopiers, says his firm hit bottom in January and has seen some recovery since then. But he adds it is not really clear yet whether this is sustainable.

The recovery seen in recent months, Shoei Yamana says, is due to companies replenishing their stocks after running them down in a hurry when business turned south late last year.

The real recovery will only come when final-buyer demand for Japan's cars, TVs and other machinery returns.

"We have not really seen any strength in end-user demand for large-screen TVs in Europe and the United States. If panel makers turn bullish and start flooding the market again, the industry might have to go right back to the inventory adjustment phase," Shoei Yamana told the Reuters Global Technology Summit in Tokyo.

How well government stimulus efforts in China, Europe, the United States and so on succeed in getting consumers to shop will play a key role here in the short term.

Longer term, Japan's ageing consumers are unlikely to ramp up spending unless unemployment falls and wages start rising again.

That suggests the fate of Japan, the world's No.2 economy, will remain in the hands of Toyota, Panasonic and other big exporters for quite a bit longer to come.

Photo credit: REUTERS/Toru Hanai; Graphic credit: REUTERS/Catherine Trevethan

Like every recession before it, this slump will end. Some day. JPMorgan economist Bruce Kasman thinks that day may come sooner than expected.

“In what feels like the first time since the Babylonian era, we are making an upward revision to our U.S. GDP forecast,” he wrote in a note to clients.

He now sees the economy contracting at a modest rate in the current quarter, which ends in June, with growth resuming in the third quarter. By the middle of next year, he thinks GDP will be growing at a 4 percent rate. That ought to be strong enough to generate jobs (although JPMorgan made no change to its unemployment forecast, which shows the rate peaking at 9.5 percent in the fourth quarter).

Why the brighter outlook? Kasman says it is largely because the biggest drags on growth — namely housing, consumer spending on durable goods, business inventories and government spending — will either add to growth or become significantly smaller negatives in the coming quarters.

He also says that just as the recession was synchronized around the world, the recovery looks like to be a joint effort as well because of fast recoveries in parts of Asian and in some emerging economies.

The Federal Reserve should not interpret signs of moderation in the U.S. recession as a reason to stop its emergency measures to heal the economy and financial markets, according to Payden & Rygel economist Thomas Higgins.

“An often overlooked danger is that policymakers may cut back on monetary and  fiscal stimulus too soon. This is what happened in Japan in the mid-1990s and in the United States during the Great Depression of the 1930s,” he wrote in a research note.

In that context, Higgins said the Fed missed a chance to stay ahead of the curve by not announcing an increase in its purchase of Treasuries, thereby allowing benchmark bond yields to climb above 3 percent.

“The Fed appears to be more optimistic than the average economist that the few signs of stabilization that we are seeing in the US economy are going to lead to a sustainable rebound in economic growth later this year. The central bank may have to backtrack on this position in the coming months by expanding its purchases of Treasuries and its overall balance sheet quite a bit more than currently anticipated.”

As things stand now, the Fed has bought $76.8 billion in Treasuries so far out of $300 billion committed in its March policy announcement. Bond yields this week surpassed the levels last seen before the measure was unveiled.

The global recession is taking a severe toll on luxury goods, with LVMH — owner of Dom Perignon, Louis Vuitton and De Beers — reporting sharp declines at its wines, spirits, watches and jewellery divisions.

However, not all luxury goods are suffering. LVMH’s fashion and leather goods enjoyed a rise in sales while Italian fashion house Prada closed 2008 in line with the previous year and said it planned further retail investments.

Luxury eating continues to suffer still. Over the past year a London Michelin-starred restaurant was put into administration and a celebrity chef’s restaurant holding was also placed into administration.

We have yet to hear updates on how the sales of renowned chef Hubert Keller’s $5,000 FleurBurger — dubbed as the world’s most expensive hamburger, made of foie gras and Kobe beef served on a brioche truffle bun topped with a sauce containing more truffles — is doing.

As men bear the brunt of the economic downturn, could the so-called “he-cession” hold a silver lining for the opposite sex?

Men make up 82 percent of all recessionary job losses in the United States, according to a recent New York Times article, mostly due to declines in traditionally male fields like construction, where the unemployment rate skyrocketed from to 21 percent in March, from 12 percent a year earlier.

The unemployment rate for adult men was 8.8 percent in March compared to 7 percent for adult women.

Male-dominated Wall Street lost 3,100 workers in March 2009 alone, depleting New York City’s most important employer to just 169,200 workers, the state’s Labor Department records show.

Women are picking up the slack, with many finding themselves as the sole breadwinners for their families — although the jobs held by women are often lower-paying with fewer benefits.

Nasreen Mohammed, for example, works five days a week, 51 weeks a year, without sick days or health benefits.

She runs a small day care business out of her home in Milpitas, Calif., and recently expanded her services to include after-school care. The business brings in about $30,000 annually, she says, far less than the $150,000 her husband earned in the marketing and sales job he lost over a year ago. “It’s peanuts,” she says.

Has the disparity of job losses given rise to what Maria Shriver calls “A Woman’s Nation”?

In a piece for the Huffington Post, Shriver wrote of her new venture to catalogue this new “seismic shift” and the potential opportunities it holds for a shift in women’s roles.

“’A Woman’s Nation’ will be a multi-year, action-oriented project, focused on capturing an accurate and up-to-date portrait of the American woman and developing next steps to remove barriers to her success.”

“A journalist by trade, I look forward to taking ‘A Woman’s Nation’ on the road - We will host a series of roundtables with men and women on the front lines of this economic and cultural shift, and conduct frank and factual interviews with cultural icons and women leaders about their experiences and recommendations.”

Will the recession break down sex-based barriers and the lead to the continuing evolution of women in the workforce, or are women the next minority to suffer? Leave your prediction in the comments section.

If you were wondering what two years of wealth destruction have done to the American psyche, the Employee Benefit Research Institute has your answer.

They have conducted surveys asking (among other things) when people expect to retire. Back in 1991, a full 19 percent thought they’d be in full-time relaxation mode before age 60. The latest survey? Only 9 percent think they’ll be that lucky.

Just 17 percent now say they expect to retire at age 60 to 64, down from 31 percent in the 1991 poll. Nearly a third think they’ll be older than 66 before they stop working, up from 11 percent in 1991.

And get this: 10 percent in the latest survey say they think they’ll never retire. That answer didn’t even register in the 1991 version.