Look at current commentary on the state of the economy and a few hot topics pop to the forefront. First, consumers: What will they spend, where will they spend it, what will they save and will they have jobs?
The folklore of our current plight is that a turbo-charged consumer drove the economic expansion over the past decade. But the picture is a little more complex. Wages did not increase appreciably, and growth in consumer consumption was isolated in a few buckets.
Barron’s had a good perspective this weekend.
There may be no position of more comprehensive agreement than that the U.S. consumer is shot — earning less, spending less, saving more, repaying debt. How many times have we seen the same numbers trotted out, about how consumer spending jumped from a long-term average of below 65% of gross domestic product to a recent 70%, and must fall back; how household debt soared from 64% of GDP in 1995 to 100% of GDP, and must retrench; or how the savings rate that used to average 7% to 11% before 1992 has just lately popped from zero to 6.9%?
It’s all true, and should be expected to restrain spending and economic activity over time. But the nuances within the numbers — and the unknowable trajectory and degree of adjustment — helpfully complicate the picture.
The consumer as 70% of GDP needs a footnote. Almost all the growth in personal consumption as a share of the economy has been health-care spending — even though government covers half of health expenditures. As strategists at Citi and Barclays have noted, personal spending ex-health-care as a share of GDP has been flat for decades. This suggests there may not be too much frivolous shopping to cut out.
Mike Darda, economist at MKM Partners, believes “the bulk of the adjustment (upward) in the savings rate has already occurred,” based on “historical relationships [among] wealth, income and savings.”
No one knows precisely how consumer psychology will play out, or whether the deleveraging process will pause, or stop at an above-norm level. Should we expect savings rates to keep rising at exactly the pace they have since the point last fall when the financial system seemed on the brink?
There’s a little nuance in the savings rate as well. The incomes included in the savings rate incorporate government benefit distributions, which accounted for almost all of the increase in income in the past month. (To get a good definition of how the savings rate is calculated, you can refer to a post earlier this year from the blog Tragedy of the Commons.
Looking at the savings rate of a long span highlights just how profligate the credit bubble — characterized by rising asset values and easy access to leverage — made the consumer. The savings rate typically spikes during recessionary periods, partly because of noise in how the number is calculated and partly because of the shift in consumer behavior driven by lower asset values.
The decline in the savings rate in the past 10 years is particularly striking when contrasted with the growth in GDP with mortgage equity withdrawals eliminated. For the better part of the last nine years, growth in GDP was fueled by cashing in on equity. At the same time, the savings rate declined, because the growth in consumption was being driven by a growth in personal debt, even as personal wages were relatively stagnant.
Buying a house was, ironically, the path to increased consumption. The debt that came along with the consumption was irrelevant, given the prospects of rising home values.
Pop the bubble and an already stressed consumer economy came to a grinding halt.
Also in Barron’s, one analyst put a bow on the problem:
“We’re unwinding 25 years of over-consuming, over-borrowing, under-saving and under-investing,” says Karl Mills, president of Jurika Mills & Keifer. The U.S. may have averted a short-term catastrophe, but longer-term growth is still scarce, and “the market has reached the point where ‘less bad’ news is no longer good enough.”