For the past 30 years, GDP growth has been fueled by the consumer. Business investment was fueled by easy credit. The government’s role of regulation and spending was reduced. Now the consumer is non-existent, paralyzed with fear of losing their home, job and retirement savings. The credit markets are frozen with lack of confidence and trust undermining all business transactions.
Insolvency
The financial system is insolvent due to this lack of trust. Even as the government pours billions of taxpayer dollars to rescue banks and insurance companies, it appears more will be needed to reassure third party risks. And those dollars will have to come from the government as consumers and businesses are tapped out.
Manufacturing
The manufacturing sector has taken a huge hit in terms of job losses. Since the start of the recession in December, 2007, the sector has lost more than 1.2 million jobs and now accounts for less than 15% of U.S. economic activity. Moreover, these jobs were dominated by men and paid more than service sector jobs, which account for 80% of economic activity.
Service Sector
On the other hand, the service sector is dominated by women. The pay is lower especially for jobs in health care and education, the two segments of the service sector that had shown some job growth, being less sensitive to the wild swings in the economy. According to the latest payroll data, women are poised to surpass men in the U.S. labor force for the first time.
Wall Street
Wall Street, however, has long been an old boy’s network. With the loss of firms such as Bear Stearns and Lehman Brothers, lots of Henrys (high earners, not rich yet) are out of a job. With the industry shrinking, many of those jobs (and the high salaries that went with them) will be lost forever. Those families and communities that depended on those jobs and salaries will have to painfully adjust to a lower standard of living. The smart will take their talents to other industries – potentially lifting the profile and salaries of those careers.
Standard of Living
The good news is that a lower standard of living will mean less consumption. The implosion of the stock market will lead to an increase in household savings instead of reliance on paper wealth. For those just starting out on their own or raising a family, this crisis is creating attractively cheap assets. Home affordability is no longer an oxymoron.
But the era of small government with no regulation is over. The complexity of this crisis, coupled with the speed with which it developed, points to government involvement of a grand scale, for quite some time to come.
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