The historically slow economic recovery and lack of substantial job growth could cause lasting negative effects on younger people and force many retirement-age individuals to keep working, according to a study released earlier this month by the Mortgage Bankers Association.
The study, “Household Reaction to the Financial Crisis: Scared or Scarred?,” analyzes how Americans will respond to the current crisis in terms of consumer spending, saving rates, credit supply and implications for the strength of the economic recovery.
“While Americans, and the American economy, are noted for their resilience, the current financial crisis and recession exceeded the devastation created by other post-World War II recessions,” said Joe Peek, a professor and endowed chair in international banking and financial economics at University of Kentucky, who conducted the study.
Peek said many Americans will continue to cut spending drastically, either out of necessity or fear, further weakening recovery.
The survey also indicated continued struggles for the U.S. housing industry.
“It is unlikely that the dramatic rise in loan delinquencies, home foreclosures and bankruptcies will show a meaningful decrease, as high unemployment and low house prices are widely projected to remain for an extended period, as well as the rise in problem loans at banks that will restrain their willingness and ability to provide credit,” Peck said.
Among the study’s key findings: • The downward trend in the personal saving rate over the past 20 years has been reversed. The saving rate rebound is likely related to the large capital losses on household assets, as well as a precautionary motive in response to increased uncertainty.
• Underemployment is much higher than the reported unemployment rate, and the persistence of spells of unemployment are lengthening. Many are delaying retirement in an effort to rebuild retirement nest eggs.
• Firms are shifting from permanent employees with benefits to part-time, temporary and independent contract employees.
• People entering the labor force during recessions have lower lifetime incomes. Those unable to find work today are going to be competing with a new crop of graduates for a set of job openings. Without a reasonably rapid recovery in employment – at this point an unlikely scenario – the nation is at risk of creating a “lost generation” that may never catch up.
• Credit supply and demand have been impacted by the financial crisis, as well as by government programs to support financial markets and the housing sector. Banks remain in weak financial health, and thus are unlikely to increase credit supply by a substantial amount in the near term. Many households will emerge from this crisis with severely damaged credit ratings.
“The severity and duration of the most recent downturn far exceeds what we have experienced in past recessions and has resulted in the disruption of millions of lives,” said Michael Fratantoni, MBA’s vice president of research and economics, in the release. “We can’t know for certain at this point, but it is more than reasonable to prepare for a world that has been irrevocably changed by this experience, (and) we should expect hesitant homebuyers, cautious businesses and conservative lenders in the years ahead.”[[In-content Ad]]
