A Pandemic Iceberg Hits the ‘Unsinkable’ U.S. Economy– A Map Ahead
The ‘unsinkable’ Titanic was designed to withstand a breach of four compartments, ensuring the ship would stay afloat. On the evening of April 14, 1912, the ship hit an iceberg, breaching five compartments, and within two and half hours, the vessel sank. Many investors think the U.S. economy, like the Titanic, is unsinkable as well. Yet, we have discovered the economy can sink when the most vulnerable sector of our economy is hit – the consumer. The country has been severely damaged by a pandemic iceberg aimed right at the consumer. Never in the history of our country have we shut down 25% of economic output in a few weeks. In just three short weeks, millions of people are out of work or furloughed with millions more to come. Goldman Sachs expects an unemployment rate of 16% or higher, levels not seen since the Great Depression. The Michigan Survey of Consumer Sentiment dropped to 71.0 for April from March’s 89.1, the largest drop on record. Consumers are sheltering in place, not going to work, or buying at stores, causing spending to drop precipitously as concerns about job security soar.
How did consumers become so vulnerable to a loss of income, job security, and standard of living? It started at least eleven years ago. During the Great Recession, corporations and banks received federal bailout dollars close to $900 billion to help move bad loans off their books, shift mortgages to the Fed, and make low-interest loans available to companies. Consumers received no relief for the reduction of the value of their homes, triggering millions of foreclosures, with 50% or more losses to savings and retirement plans. Millions of homeowners lost significant amounts of equity in their homes.
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