As we near the end of 2012, certainly a stressful and confusing year, it is appropriate to step back and look at some of the big-picture trends that we will all be living with in the future. One phrase you will hear a lot next year is “shared sacrifice.” Unfortunately, many people miss the “shared” part and like it best when someone else does the sacrificing.
In analyzing consumer spending trends, one of the most reliable cyclical indicators for American consumers is the restaurant sector. Lately we’re starting to see economic reports that restaurant traffic is slowing down rather sharply and companies are issuing warnings of slowing earnings. It is a sign that families are becoming more cautious in their spending and eating habits. Grocery shopping is up in two of the past three months and double the trend of the restaurant industry.
Is this an ominous trend or just an aberration? It’s too close to tell at this point but it certainly has my attention. A downward trend in “eating out” has broader implications though. Lately everyone has been focused on the “fiscal cliff” political circus, but it is more appropriate to look at what is happening on Main Street. At times like these, it is important to understand where the real economic power resides and that is with the people. And not just where they shop, but where they eat, in this era of frugality.
In my opinion, deflationary pressures are still more worrisome than inflation for now. Whatever the ultimate outcome of the fiscal cliff negotiations, you can bet the ranch that taxes are going up and spending will be cut. Of course, how much and in what form remains to be seen. As the tax base gets broadened and entitlement reform takes hold, an enormous amount of shared sacrifice will be required. There’s that phrase again. While everyone likes the idea of less government spending, there are near-term consequences. Less government will require a move toward tighter budgets and this will contribute to stress in the job market and after-tax personal incomes, at least for a while. Be careful what you wish for.
Furloughs, layoffs and now less-generous pension benefits for current public workers and retirees are occurring for the first time. Sweeping changes are taking place at the state level as pension trustees and legislatures push for higher monthly contributions to pension plans, a later retirement age and lower annual cost-of-living adjustments for current and retired workers. Unions, at least the ones that don’t make Twinkies, are making concessions because they can see the future — the termination of defined benefit plans in favor of defined contribution plans. Any way you look at it, employee contributions are going up — which is a form of a tax hike. And this will work directly against any upturn in consumer spending when you consider that the state and local government sector employ nearly 20 million people or 15 percent of the nation’s jobs.
So we will have less government, fewer entitlements and more whisperings that it isn’t just the $250,000-plus high-income households that are going to experience tax increases and diminished disposable income growth. This is shared sacrifice. By the way, to think that the nation could have ever gone to war in Iraq and in Afghanistan, putting our troops at great risk, not to mention the emotional toll on their families, while here at home civilians would be allowed to enjoy tax cuts and a debt-financed consumption binge, is outrageous. Remember when if a war was worth fighting everyone did their part? This certainly was not shared sacrifice.
At all levels of the social structure, starting with households and followed by unions and governments, the U.S. will be swept up in a move to frugality now that the baby boom generation has run out of time to speculate. They will be saving the old fashioned way. None of this argues for any significant increase in economic activity.
The baby boomers will, out of necessity, be pursuing a strategy of working longer, saving more and liquidating debt in order to secure a comfortable retirement. At the same time the public sector also will move in the very same direction toward fiscal responsibility. In the case of government, solvency eventually will be restored by reducing non-essential services and severely means-testing entitlements while increasing taxes and user fees. No one will be happy with the outcome.
One has to wonder what events could provide positive momentum to GDP growth, push corporate earnings to record highs as the consensus predicts as early as next year, or generate any lasting inflation. It’s the people that make these pricing decisions. Businesses can only price up to what consumers are willing to pay. It is households that determine whether or not we have inflation, not some bureaucrat in Washington who believes he has control over some printing press. And when the underlying growth trend is already below 2 percent, one can see that deflation risks are real.
Yet, many investment analysts are surprisingly upbeat. This all begs the question of what we are supposed to be bullish about, especially since a zero percent interest policy rates leaves cash as little more than a tactical asset? Rather than looking for an increase in inflation, it seems far more likely that we could be in for a prolonged period of price stability or modest deflation. I will write more about this in 2013. In the meantime, be patient until the next cycle of growth and global expansion starts in a few years. Thanks for reading.
NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.