Originally Published in the Catalyst Quarterly June 2011

Federal and local governments are seeking ways to put their financial houses in order, and unfortunately higher taxes and/or lower transfers to consumers will likely be part of that. Furthermore, consumers’ balance sheets are threatened by declining house prices and the stock markets’ vulnerability to monetary tightening. With credit conditions relatively tight and the need to deliver still in place, credit-financed consumption growth is some years off.

The big question revolves, then, around where consumption growth will come from. Employment growth is barely sufficient to provide enough jobs for new entrants. A rapid improvement in employment growth is unlikely as monetary intervention stops and fiscal tightening continues. This means unemployment will stay elevated, with sluggish wage growth at best. As a consequence, income- and credit-based consumption growth are unlikely to provide  the much needed fuel for U.S. economic growth resulted in low G.D.P. for the remainder of 2011.

This leaves us with the investment and net export sectors of the economy to accomplish the 3.5% growth expectation that most economists hoped for in 2011. We’ll let the financial sector speak for itself. Our current article on global conditions reflects the continuing weakening demand for our exports through the remainder of 2011. A temporarily strengthening dollar will not help in this area.

The U.S. economy will grow and recover over time. Despite our current jobs and housing slump we have the strongest, most diversified, and most stable free market economy on the planet. However, as we said in our last issue (contact us at 888-600-2370 for a copy), forecasts of a 3.5% growth for 2011 were too optimistic, and we do not see how we could hit that number in 2012, given the harsh reality that fiscal and monetary stimulus are being withdrawn.

It’s true that consumers have reduced consumer plus mortgage debt from $13.2 trillion in the second quarter 2008 to $12.5 trillion at the end of last year. In conjunction with lower interest rates, this might look sufficient to make the consumer debt load more bearable. However, over the same period, public debt increased from $9.4 trillion to $14.0 trillion, while non-financial sector debt didn’t change all that much. This means total U.S. debt (excluding financials) has increased by a whopping $3.9 trillion.

The reality is that the U.S. can expect anemic economic growth at best as it necessarily works through the deleveraging process. Generally U.S. consumers will remain cautious in their spending.

Consider focusing your business and/or service on value propositions of lower price/higher quantity. Evaluate your local market, and adjust your forecasts and business plans for the remainder of 2011 accordingly. In the interim, keep your eyes peeled for new monetary stimulus. Many arguing against its resumption today may be agreeing it is needed before the end of 2011.