The New Abnormal

Just when some people thought it was safe to consider the Great Recession over came news that the U.S. economy has stalled, unemployment remains high and consumer confidence has suddenly taken a nosedive. What the heck’s going on here?

Mohamed El-Erian, CEO of top bond shop Pimco last year declared a “new normal” – a global economic realignment in which American spending habits went from conspicuous consumption to downright thrift.

But Bloomberg Businessweek begs to differ in a recent article, calling the economic retrenchment “the new abnormal, in which no one knows anything.”

Those aren’t exactly words that inspire confidence. And Bloomberg trots out some disturbing figures. The Conference Board Consumer Confidence Index fell 9 points in June, following an 11 percent drop in the S&P 500 the month prior; new housing starts were as bad as any time in the previous eight months and unemployment is still at around 9.5 percent. To top it all off, Federal Reserve Chairmain Ben Bernanke declared July 21 that the economic outlook is “unusually uncertain.”

Yet Bloomberg reminds readers that while 1 in 10 Americans is out of work, conversely 9 of 10 are not (though Bloomberg neglects to consider the percentage of those who have either stopped looking or are otherwise “off the grid”).

But what it does mean is there’s a whole lot of people who are “liquidity constrained,” says Kenneth Rogoff, Harvard University professor and former chief economist at the International Monetary Fund.

Perhaps an example of a “liquidity constraint” close to home might be Joe Cool, college student, with a tapped-out credit card. Guess who is not buying concert tickets this year?

They are “probably not the ones buying iPads,” Rogoff told Bloomberg. “But 90 percent of Americans do have a job, and maybe 70 percent are confident about them. And maybe half of those have liquidity.” So, theoretically, they should be spending money, right?

Maybe not. Bloomberg’s “new abnormal” has “given rise to a nation of schizophrenic consumers,” the paper said. It described “schizophrenic consumers” as spending on high-end discretionary items but cutting back on brand-name items like soap and toothpaste and opting for off-brands.

On the high end, the theory explains Apple and Starbucks with income spikes of 94 percent and 64 percent, respectively. They’re thriving. So, apparently, is Mercedes-Benz, which is having record sales this year. Lexus and BMW are also up.

On the low end, it also applies to Family Dollar Stores, which has seen a 19 percent income spike in the last year.

Bloomberg describes an environment in which optimism ebbs and flows constantly, which inevitably affects consumer confidence – and in the U.S., consumer spending accounts for 70 percent of the gross national product. What economists are seeing is a bouncing-ball effect; a series of boomlets and busts.

Of course, everyone’s trying to read the tea leaves to find a steady upward trend, so we can call the recession absolutely, positively over. And many of us thought we saw just that earlier in the year. Then it seemed like the bottom dropped out. In June, the stock market gave up 4 percent of its value.

As Bloomberg put it, “like teenagers suffering mood swings, consumers lost their nerve all over again.” The consumer confidence index hit a five-month low July 27, which was blamed on job insecurity.

But Columbia Business School prof Ran Kivetz, who has reportedly done extensive research on consumer psychology, argues that part of the problem is simply the way consumers are wired.

He told Bloomberg that “consumers’ brains lack a line that separates spending from saving. Instead, we practice a certain amount of thrift so that we can justify blowing a large sum frivolously.”

The ongoing downturn has made consumers’ thinking conflicted, with periods of gratification and guilt, which leads to “more irrational purchasing.”

Kivetz tells Bloomberg that is exactly what’s happening now. When the recession first struck, consumers reacted quickly by cutting spending. When it lasted longer than expected, “the new abnormal” set in when the economy appeared to improve, that is, until it didn’t.

Kivetz says the psychological need to spend can be suppressed only so long before consumers go on a collective bender. “It’s just been a slow walk out of the woods,” he said. “And it’s so complicated.”