Mercury Rising 鳯女

Politics, life, and other things that matter

Consumer-led recession turns into business-led recession

Posted by Charles II on December 15, 2008

Recessions come in all kinds of flavors. This one began as housing led: a decline in demand for housing caused that sector to contract. It then developed into a consumer-led recession: as housing prices fell, consumers were unable to borrow against their home equity. Also, credit card companies started cutting lines of credit. So consumers cut back on spending. And now the recession is developing into a business-led recession, creating the opposite of a virtuous circle, namely a vicious spiral. Richard Milne, FT:

Companies are scrambling to cut inventories before the end of the year in a move that is depressing activity across many industries and could lead to some businesses collapsing.

Chemicals and steel producers, carmakers, housebuilders, retailers and consumer goods manufacturers have all complained of customers and suppliers cutting orders sharply to reduce the amount of stock they hold because of plummeting demand.

Such destocking is also taking hold as raw material prices plummet and companies wait longer to buy products that are getting cheaper.

Feike Sijbesma, chief executive of DSM, the Dutch life sciences group, said destocking was causing pain throughout the supply chain. “Some smaller companies might fail,” he said.

“The destocking effect is unprecedented. We have never seen anything like this,” said Tom Crotty, chief executive at Ineos, the UK chemicals group.

Short term, it’s a recipe for deflation. Long-term, it’s a recipe for shortages and wild inflation. The only way to stop it is to get people to start buying again.

3 Responses to “Consumer-led recession turns into business-led recession”

  1. Aaron said

    I agree with your basic premise. Very concise and to-the-point. The only thing I would add is to comment on the taxing effect of 3+ years of exorbitant energy (read: gas, diesel) prices on the consumer’s wallet. This must have had an effect on the lower income segment’s ability to consume. And since they spend nearly 100% of their disposable income, it stands to reason sending all that $$ to the Middle East and Central America instead of buying goods and services here, definitely hurt as we headed into the housing recession.

  2. Stormcrow said

    This is what happens to an industrial state where the lower 90% of the socioeconomic pyramid is unmercifully screwed for 40 years.

    They end up unable to afford what business produces, so the businesses start going bankrupt.

  3. Charles said

    The rise in energy prices, especially gas prices, had a significant and regressive effect, Aaron, though I wouldn’t compare it to taxation.

    The reason I wouldn’t compare it to taxation is to be found here. This is a graphic from a few years ago showing the general situation for gas taxes. Our economy was doing just fine despite the fact that our low taxes made gas much more affordable in the US than elsewhere. In other words, low energy prices in the US are the exception, not the rule, so whatever tax-like effect must have been modest.

    But I agree that cet. par. a rise to the cost of productive inputs is unhelpful to economic growth.

Sorry, the comment form is closed at this time.

%d bloggers like this: