Why The American Consumer Is Not OK

2 comments

Stephen S. Roach, formerly of Morgan Stanley Asia and now at Yale’s Jackson Institute of Global Affairs, has a timely piece on Project Syndicate explaining his view that any news of a recovery for US consumers is hype and not supported by the data.

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Roach’s analysis suggests to him that the typical post-recessionary release of “pent-up demand” simply is not occurring, despite the Fed’s QE efforts:

Over most of the postwar period, this post-recession release of pent-up consumer demand has been a powerful source of support for economic recovery. In the eight recoveries since the early 1950’s (excluding the brief pop following the credit-controls-induced slump in the 1980’s), the stock-adjustment response lifted real consumption growth by 6.1%, on average, for five quarters following business-cycle downturns; spurts of 7-8% growth were not uncommon for a quarter or two.

By contrast, the release of pent-up demand in the current cycle amounted to just 3% annualized growth in the five quarters from early 2010 to early 2011. Moreover, the strongest quarterly gain was a 4.1% increase in the fourth quarter of 2010.

This is a stunning result. The worst consumer recession in modern history, featuring a record collapse in durable-goods expenditures in 2008-2009, should have triggered an outsize surge of pent-up demand. Yet it did anything but that. Instead, the release of pent-up consumer demand was literally half that of previous business cycles.

Roach believes that “the American consumer’s nightmare is far from over. Spin and frothy markets aside, the healing has only just begun.”

Not only do I agree with Roach’s analysis of conditions to date, but I wonder whether the “healing” he mentions will restore consumer confidence to pre-recessionary levels any time in the next decade. My impression is that, unlike after other recessions, the typical American really has little faith that what happened in 2008 won’t happen again in 2014 or 2015. This is because while people have a general outline of what caused the last financial crisis — “too many bad mortgage loans” seems to be the general explanation — they do not really understand its causes or most of its social and economic ramifications. Uncertainty about the future breeds caution in all but the most risk-friendly individuals, and it’s this caution — combined with the lackluster rebound in job creation, which only confirms many people’s worst fears — that is driving the phenomenon Roach observes.

The inability to understand the basic economics of the society in which one  resides is a worrisome trend, and something I will explore more in an upcoming post. In the meantime, Roach’s clear analysis is worth careful consideration.

Read more at http://www.project-syndicate.org/commentary/america-s-over-hyped-consumer-recovery-by-stephen-s–roach#h1705i7BIg0yyV6j.99

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2 comments on “Why The American Consumer Is Not OK”

  1. I agree with the concern. I just started reading Joseph Steiglitz’s “The Price of Inequality,” in which he is arguing that the US is headed toward a future where a small percentage of the people wind up owning pretty much everything. I hope he is wrong about that, since the US has a history of getting close to disaster and then pulling back from the brink and doing the right thing in the end.

  2. Thanks Carlos. It is very difficult to accumulate enough accurate information to effectively model what is going to happen in the US economy. That said, the lack of job creation is one of my biggest concerns given the impact jobs have on overall consumption in the US economy.

    Best of luck

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