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.
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.