NewAbnormal.docx

NewAbnormal.docx - Cover Story 5:00PM EST The New Abnormal...

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Cover Story July 29, 2010, 5:00PM EST The New Abnormal Americans are broke and depressed—and also swilling $3 lattes and waiting in line for iPhones. Welcome to the schizophrenic economy By Devin Leonard In March, Ralph Ronzio went to a warehouse in a seedy part of Orange County, Calif., and watched a guy auction off his condo for half what he'd paid for it. Ronzio had bought the place for $329,000 in 2005, when he moved to Southern California from Rhode Island to take a job at a data-storage company. It was the first place he'd ever owned. "It was totally my bachelor pad," he says. "Not much inside other than the usual leather couch and the big screen TV. My fiancée made me sell the couch." That wasn't the only thing that changed when Ronzio got engaged. His fiancée had two young children, and there wasn't enough room in the condo for all four of them. So last year, Ronzio bought a house nine miles away and they all moved in. He figured he could rent the condo and cover his costs. He figured wrong. The more he thought about the money he was losing, the more it stressed him out. Finally, Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 on his condo mortgage. When the bank foreclosed, he says he felt an enormous sense of relief. He also had more cash. He and his fiancée took the kids to Disneyland. Ronzio, 31, gave himself a treat as well. "I bought myself an iPad," he says. It used to be that someone like Ralph Ronzio could be fairly certain of the outcome when spending a few hundred thousand dollars on real estate. Housing prices were headed in only one direction. You could surf the boom and borrow against your home equity to pay for all manner of splurges—a vacation, a flat-screen TV, the latest Apple gadget. It may have looked like a lot of debt on paper, but considering that housing prices nearly doubled from 1999 to 2006, there was always an escape hatch: Sell your house and make enough money to pay it all back. That was the old normal. Last year, Mohamed El-Erian, CEO of PIMCO, the influential bond shop, declared a "new normal," a global realignment in which the U.S. consumer, no longer a hungry monster, became cautious and subdued. The current circumstances might be better described as the new abnormal, in which no one knows anything. In June the Conference Board Consumer Confidence Index fell 9 points on the heels of an 11 percent drop in the S&P 500 the month before. New housing starts were as bad as they had been in eight months. Meanwhile, the unemployment rate still hovers near double digits. That's 14.6 million Americans out of work. Federal Reserve Chairman Ben Bernanke only added to the anxiety with a July 21 declaration that the economic outlook is "unusually uncertain."
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So who are all those people at the mall? It's easy to forget that a 9.5 percent unemployment rate means that roughly 9 out of 10 Americans in the workforce are still employed. "Some consumers are probably liquidity-constrained," says Kenneth Rogoff, Harvard University professor and
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This note was uploaded on 02/09/2011 for the course MKTG 301 taught by Professor Staff during the Fall '08 term at George Mason.

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NewAbnormal.docx - Cover Story 5:00PM EST The New Abnormal...

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