Lately, I’ve been pondering about where the economy recovery is going to come from. If you listen to the experts, they don’t seem to know either. The first factor worth analysing for the United States is the consumer because consumption currently makes up about 68% of GDP.
This whole economic crisis has brought a big wave of “de-leveraging” in the household and business sector. Americans are spending a little less and saving a little more. However, it may be that households have a long way to go before they are “de-levered”, at least according to the numbers up to the fourth quarter of 2008. The Federal Reserve will release new information on household debt on Thursday when it releases the “flow of funds” data for the first quarter of 2009.
For now, looking at these charts from Economist David Rosenberg:
We can see that debt as a % of net worth and debt as a % of assets had been growing rapidly since the late 1990s. In general, consumption was fueled by cheap credit and this accumulation of debt. Problems arise if we believe U.S. consumer debt is still near saturation and that credit is going to be tight for the next few years. This means that we won’t be able to keep consuming at the rate we’ve been doing in the last 10+ years.
Less consumption, means less GDP, which means less economic recovery.
The economy may be getting “less bad”, however, the U.S. growth engine is still with high levels of debt and with little room to maneuver. Real consumption is having a hard time:
Is there a solution besides increasing debt? Increase productivity => which increases disposable income => which means more consumption. Now that’s the “sustainable” solution. As long as we try to increase economic recovery by more debt, it’s going to be hard to get out of the whole mess in a “sustainable” manner.
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