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Recession In 2008? What Does That Mean For Consumers?

Slowing economic growth hurts those with high debt, scant savings

By Mark Huffman
ConsumerAffairs.com

January 10, 2008

The technical definition of a recession is two consecutive quarters of negative economic growth, as measured by a country's gross domestic product. So, by definition, a recession won't be formally declared until we'll actually been in one for six months.

But how will consumers be impacted if a recession has already begun? How will they know?

When the economy contracts, less business is getting done and less money is changing hands. Businesses often find themselves in a more difficult environment. They spend less with other businesses and, more important to consumers, often reduce their work force.

"I think the key concern for a consumer in a recession is the worry that they'll lose their job," said Joel Naroff, Chief Economist at Commerce Bancorp. "If it's an extended recession, there will be fewer, and smaller pay raises and bonuses, so they'll be bringing in less income."

However, job elimination has been happening with greater frequency over the last decade without a recession. The rise of the global economy has prompted many U.S. based companies to close factories and outsource the work to other countries.

Credit crisis

Some economists see debt, and the current credit crises, as a significant threat to consumers in a recession. Stephen Roach, chief economist at Morgan Stanley, points to the problems in the housing industry – where home values have begun to fall – as a chief concern for consumers.

"That puts the income-short, saving-short, overly-indebted American consumer now very much at risk, Roach wrote in a note. "February's surprisingly weak retail sales report - notwithstanding ever-present weather-related distortions - may well be a hint of what lies ahead."

So it would appear that consumers with a shaky job position at work and who are loaded up with debt would be most vulnerable in a recession. But what about consumers who keep working and have a manageable debt load?

Naroff concedes it is possible that many of these consumers might actually benefit from a recession.

"There's no question that businesses get more aggressive from a price standpoint in a recession," Naroff told ConsumerAffairs.com. "A consumer shopping for a new car, for example, may find a lot more deals and incentives than when times are good."

Oil prices

There's also the matter of gasoline prices, which have spiked again as crude oil briefly hit the $100 a barrel mark early in 2008. In past U.S. recessions, oil prices have tended to fall. But will that hold true this time, when economies in China and India keep world oil demand soaring?

"That is the $20 a barrel question," Naroff said. "China, for example, is so dependent on the U.S. consumer for its economic growth, that a recession in the U.S. is likely to have some impact on China and its oil demand. The question is, how much?"

At moment, it may be a moot point. Naroff does not share the view the U.S. economy has already begun a recession.

"The economy is soft and the risk of a recession is rising, but I don't think we're at that point yet," he said.

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