Friday, January 23, 2009

Steve Ballmer Gets It Right

From IBD:

"We're certainly in the midst of a once-in-a-lifetime set of economic conditions," Microsoft Chief Executive Steve Ballmer said on a conference call with analysts. "The economy is resetting to a lower level of business and consumer spending that's based largely on the reduced leverage in the economy."


First, consider this post from a few weeks ago. Here is a quick summation:

1.) Savings has been declining since 1980

2.) Total household liabilities started increasing at this time

3.) Currently, the financial obligations ratio for households is below 14% -- near one of its highest points in decades

Coordinate this data with information of median family income from the Census Bureau, which shows that median household income has been pretty stagnant for the last 8 years

And add one last piece of information: according to the Federal Reserve consumer credit has dropped the last two months.

Let's tie all of this together.

For the last few decades, household incomes have not kept pace with the consumer's desire to spend. As a result, the consumer has taken on larger and larger amounts of debt.

Now we are probably starting the great unwinding; that is, consumers getting rid of all their debt (or at least paying some down). While this is good in the long run because it will create a healthier consumer it is bad for the economy because the US economy derives 70% of its growth from consumer spending. And that's what Ballmer is getting to.