One short term benefit to being a consumer based economy is not being on the supply side when the sudden changes in economic conditions take place.  To get a clearer picture of the economic reality, a picture that is not only focused on the pain the U.S. economy is facing, look beyond our borders to the countries that count on exporting goods in order to sustain economic growth.

Japan

The second largest economy in the world contracted at an annual pace of 12.7% last quarter.  By the very loose definition of an economic depression (10% or greater of negative growth), the Japanese are facing what the world fears most.  The contraction was accompanied by a decrease in exports by 45.7% from a year earlier, and a 31.7% decrease of imports.

This suggests three very obvious things – The Japanese consumer is not spending, the countries Japan exports to are not purchasing goods, and result further contraction is highly likely.

While still low, it would be reasonable for unemployment to start rising in Japan as companies, mainly manufacturing, begin slowing output or laying off staff in order to “right size” to the challenging environment. Toyota, a company known from not laying off staff during rough economic periods, will begin offering buyouts to employees. It’s just a matter of time before Honda and Nissan follow suit.

Germany

Germany, Europe’s largest economy, also fell victim to a decline in exports.  As a result, the country was the largest economic contraction in about twenty-two years.

While not as drastic as the numbers out of Japan, Germany’s decrease in exports by 7.6% is quite significant considering most look at the German economy as the beating heart of the Euro-zone.  Companies are halting production, laying off workers, and preparing for a significant decline in growth as economists expect the German economy to contract by 2.25% this year.

Seems to be a common theme, no?

Looking at this information makes me wonder…

So, have I stopped purchasing?

Hell yes!

I cannot even begin to remember when I spent a significant amount on an item that would be considered “discretionary”.  If I really put my mind to it, I would say last December I spend $150 on 3 pairs of Wool pants.  Everything else I purchase would fall into the category of household goods (weekly groceries) or entertainment costs (weekend brunch or a movie).  Any excess that I have goes immediately to paying off debts as I fear about my future, and I fear about my ability to provide for myself as I look at the events unfold around me.

While the U.S. economy is consumer based, we can see that the consumer – namely you and I – have stopped spending on goods.  As a result, we are no longer importing goods from our trade partners.  Once the economic data coming from Japan and German begin to stabilize, and only once the data stabilizes, will the world truly know economic conditions are beginning to improve.

Within the last 6 weeks the nation was told that consumer confidence has dropped to an all-time low, foreclosure rates jumped 81% in 2008, unemployment now stands at 7.6%, the auto industry faces the worst market in decades, and the national deficit will be the largest ever – 1.5 trillion – what else is there that could be said that we don’t already know?

How about a bit of potential hope?

This morning, the Fed Chairman Ben Bernanke said the following:

In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half.

Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent.

If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability–and only if that is the case, in my view–there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.

With the inconsistent message coming out of the last two administrations regarding the economic climate, I’m unsure how to take Bernanke’s comments. Is he implying that, in the best of all possible worlds, if everything good that can happen does, the economy will start to grown once again at the end of this year?

The world we live in today has very, very pessimistic economic data in every category – none of which points to a near term recovery – so what information is Bernanke (and the Fed) looking at to draw this conclusion? Bernanke does not appear to be a person who would make a statement in order to calm the stock markets, so this just makes me wonder what else is going on that we are unaware of.

One thing I fear about the current economy, and the attempts to move a recovery forward is President Obama’s pledge to cut the federal deficit by roughly half over the next four years.

No detailed approach has yet to be presented to the public, but what little information that is known points to a significant cut in defense spending (ending/scaling back the war in Iraq) and raising taxes on the nations richest.

What bothers me about the heavier taxation is the potential effect on the recovering economy. During the Great Depression, Hoover raised taxes as an attempt to balance the budget. This decision only lengthened, if not strengthened, the economic downturn. While one would not expect the top marginal rate to rise to great depression levels, it still is a dangerous line to walk – less disposable income leads to less economic activity.

Another bit of promise was provided by Bernanke today when he plainly stated:

“We don’t need majority ownership to work with the banks,” Bernanke said today. “We have very strong supervisory oversight. We can work with them now to do whatever is necessary.”

Translation: There is no need to nationalize banks.

That is what the administration is saying right now, but as this entire situation has taught economists everywhere this is an ever-changing situation. What is workable today my not be so tomorrow.

With the President speaking this evening, and Treasure Secretary Tim Geithner presenting more information on the banking plan tomorrow, the next few days will be very interesting to watch.

2/24 – 8:17PM UPDATE

Calculated Risk has an interesting question/point on this very subject.

If the banks are seriously insolvent, this sounds like the zombie bank approach and rewards existing shareholders at the expense of taxpayers. If the banks are not seriously insolvent, this is a reasonable approach. But how does Bernanke know the solution before the data is available from the stress tests?

So how can Bernanke say that no nationalization will take place if the data to determine so has not yet been established?  Makes one wonder just a bit more, doesn’t it?  I want to know what Bernanke knows that he is not saying…and if he is not syaing it, why is he withholding the information?  It’s clearly positive if he can determine that no nationalization is needed.

The Consumer Confidence Index, or the optimism of the U.S. economy, is now at 59.8, up from 58.5 (August). That was a small, unexpected, rise for the month of September as economists were expecting a rating of roughly 55%.

The information was gathered before the political mess known as the financial bailout took place so any fear the consumer / general public is experiencing is not yet reflected in the data.

If Fear, uncertainty and doubt (FUD for you sales and techie types) is still in the market over the next few weeks, expect this number to fall – along with spending.