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Dec. 28, 2009, 12:01 a.m. EST · Recommend (2) · Post:

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Deflation delusion may soon pop

Outages show customers still rely on BlackBerry

By Jeffrey D. Korzenik

CHICAGO (MarketWatch) -- The end of the holiday shopping season reminds us of the importance of the consumer to the U.S. economy.

Looking beyond the current recession, most economists worry about future consumption trends for good reason. The wealth destruction of the past two years, rising commodity prices eroding disposable income, enormous household debt, and a subdued "spirit of the times" all suggest that spending may be restrained for years to come.

However, the doomsayers overlook the significant role that the growth of dual-income households has played in changing savings and spending habits. An examination of these trends offers hope that, while American consumers may be wounded, they are far from dead.

The chart below illustrates the decline of the personal savings rate (and consequent rise in consumer spending) from the mid-1970s through mid-2008. The move from double-digit savings to virtually no savings has been widely remarked but little explained despite the enormous economic impact of this trend. Many rationales center on the "irresponsibility" of the American consumer, a highly unsatisfying and incomplete explanation.

Could the growth of dual income households have been responsible for this secular shift? Unfortunately, good data on per capita income and expenditures are hard to come by when broken down by single- and dual-income households. In the absence of these statistics, the impact of this major demographic change been largely neglected.

There is good data, however, on the rate of female labor force participation, and this offers a good proxy for tracking dual income household growth as seen in the chart below.

Clearly, the rapid ascent of dual income households (assuming female labor participation is a good proxy) from 1974 to 1998 was accompanied by a corresponding decline in the savings rate. Logic suggests that this is more than coincidence. A dual-income household can also be viewed as a diversified-income household.

This diversification allows for greater certainty that some income will be available in an economic downturn and lowers the volatility of actual income for these households. This, in turn, lowers the need for a sizable "rainy day" fund; a lowered saved rate, in turn, would be a reasonable economic response.

At least in part, the drop in the U.S. savings rate should be seen as a rational response to changing demographics rather than an example of widespread household fiscal irresponsibility. If American consumers should reasonably be saving less, then they should consequently be spending more.

A linkage between dual income households and consumer spending would explain much of the last few decades' economic anomalies. This shift towards diversifying sources of household income may, for instance, have accounted in part for the "great moderation"; in the few decades preceding our current economic woes, recessions seemed to be milder and shorter, as the consumer appeared to be more resilient and less cyclical.

Unfortunately, there's a flip side to the stabilization brought by dual income households -- namely, this reduced volatility led to an excess of confidence. John Augustine, chief market strategist at Fifth Third Bank, suggested that the trend towards dual income households more recently contributed to the debt overload of the American consumer. Augustine points out that this led these consumers to take on too much debt as the combination of diversified income was reinforced by a positive economic experience.

The addition of a second income was indeed a new and real factor in the economic decision making of consumers. While by no means an exclusive factor in promoting lower savings/higher debt, it likely is a contributory element. At least in the initial stages of this three-decade trend, the reduction of savings was a reasonable and rational response to greater diversification of income. Although this may have engendered dangerous overconfidence and an excessively low personal savings rate, the economies of a dual income household suggest that savings should not return to the high levels of the past.

So what does this mean for current investors? Many believe that consumers will revert back to the thrift of the past, severely deleveraging, all to the detriment of the economy and the stock market. However, if household income diversification is indeed a motivating factor, the "new normal" may not be so draconian. The vast majority of dual income households will survive this cycle with at least one paycheck intact. Even in today's challenging 10% unemployment rate environment, statistically, the odds of both earners losing their jobs in a dual-income household are only 1 in 100.

As we exit the recession, members of dual-income households are finding that their economic model may be tarnished, but not broken. While all households are retrenching, the dual income group likely will not deleverage to the extent of single income households, and our national consumption patterns may show greater resiliency than the pessimists expect.

It's often said that "demographics is destiny;" the reality of the high number of dual income households argues for a happier outcome than we might otherwise anticipate.

Korzenik is the director of portfolio management for Fifth Third Private Bank in Chicago.

I am not a consumer. I am not defined by what I buy and consume. I am a citizen. And I save about 50% of my take home income. Anymore, I refuse to buy things I don't need and when it comes right down to it, I don't need much. That's better for my bank account and the planet."

- rubyfan | 1:15 a.m. Today1:15 a.m. Dec. 28, 2009

Research In Motion clients in North and South America have vocalized their outrage in recent days over BlackBerry outages. And their anger has been heard.

3:42 p.m. Dec. 23, 2009 | Comments: 15

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