Office of the Vice President for Global Communications

Thursday, September 17, 2009

ISR unveils sober economic news at Washington, D.C., anniversary event

A pair of U-M economic studies show consumer spending will lag rather than lead the recovery from the current recession, and while older Americans appear to be weathering the economic crisis relatively well, many expect they’ll have to work longer than they planned a year ago.

U.S. Rep. John Dingell, D-Dearborn, congratulates the Institute for Social Research during its 60th anniversary celebration in Washington, D.C., on Wednesday . (Photo by Mike Waring, U-M Washington Office)

The findings were presented Wednesday at a Washington, D.C., breakfast event marking the 60th anniversary of the Institute for Social Research (ISR).

Saving more, spending less

“In the coming years, U.S. consumers will save more and spend less,” says economist Richard Curtin, director of the Reuters/U-M Surveys of Consumers. “The recovery will be slow and uneven, and it could take a decade or more for consumers to restore their sense of financial security to pre-recession levels.”

Although September’s preliminary, mid-month consumer sentiment index of 70.2 signals that consumers think the worst is over, the fundamental changes in how they view their economic situation and its impact on their spending will persist for some time.

“Consumer confidence fell to a greater extent in 2008 than in any other year during the past half-century, with only minor gains recorded so far in 2009,” Curtin says.

Based on changes in the index, Curtin expects that the economy has begun to slowly recover, from a 2.5 percent decline in real gross domestic product in 2009 to a gain of about 2.4 percent in 2010. Personal consumption expenditures, however, are expected to grow by just 1.6 percent in 2010.

A surge in housing and vehicle sales — the traditional drivers of an initial economic recovery — will not materialize this time around, he says. “Record levels of job and income uncertainty continue to cause consumers to postpone purchases of homes, vehicles, and durable goods,” he says. Moreover, changes in the terms and availability of credit will continue to have a negative impact on these purchases.

Instead of spending their way out of this recession, the top priority of consumers is to replenish their savings.

“Most saving and spending is done by people ages 45 to 64 and in the top fifth of the income distribution,” Curtin says. “Consumers, especially the aging baby boomers, have expressed heightened concerns about their retirement savings. Most fear that if they do not save and restore some lost savings, a comfortable retirement will be threatened.”

In August, 61 percent of consumers said the probability of having a comfortable retirement was lower, well above the 29 percent recorded at the start of the recession.

More likely to work longer

Meanwhile, a separate study of Americans age 51 and older indicates more expect to be working longer past age 65 than they thought they would a year ago.

“We asked the same older workers what the chances were that they would still be working full time after age 65, and they went up from 47 percent to 57 percent between 2008 and 2009 — a very rapid change after a long period of stability,” says ISR economist David Weir, director of the Health and Retirement Study. The chances of working past age 62 went up from 60 percent to 65 percent.

“This study is the first to show a clear change in work expectations among the same group of older Americans,” Weir says. “The findings provide compelling evidence that people have changed their retirement plans as a result of the financial crisis.”

The survey found what Weir called a “historically unprecedented” exposure to the stock market, with 62 percent reporting stock holdings in 401(k)s, IRAs, mutual funds, or other vehicles. Reported losses ranged from 20 percent in IRAs and 401(k)s to 25 percent in mutual funds, and 30 percent in stock in single companies. 

The survey also found that nearly a quarter of older Americans reported a decline in the value of their home. Slightly less than half still have home mortgages, and about 7 percent of these reported that they are “under water,” owing more on their home than it is worth. About 3 percent of those with a mortgage said they had fallen behind on payments, but just three-tenths of one percent reported they had entered foreclosure.

“Many more older Americans are experiencing the financial crisis through the housing troubles of their children than through their own difficulties,” Weir says. “Nearly 10 percent says someone else in their family had fallen behind on a mortgage.”

Nearly 24 percent surveyed after the crisis said they were not satisfied with their financial situation, compared to about 17 percent when they were surveyed in 2008.