What Will an Economic Recovery Build Upon?

There's been a lot of talk recently about the economy. Has it bottomed? Are we recovering? Will we see a "V" shaped bounce? Or a "U"? Or a "W"?
Since most of the economic numbers are still negative, it seems a little premature to talk about a recovery. Nevertheless, since the cheerleaders of the economy have brought it up, let's examine exactly what is going to lead this economy out of our deep recession.

In order to do that we must look at a topic that the Green Shoots crowd doesn't mention much -- the fundamentals of the economy.

I'm going to make this as simple and uncontroversial as possible.

Since consumer spending is more than 70% of the American economy, let's start there.

This chart shows us clearly why the economy has contracted so much. It also shows a clear bottom in consumer spending. The question is whether than bottom is temporary or permanent?
To answer that we must look at the fiscal health of the consumer. There are two measurements of that - money coming in and money going out.

As you can see, workers have virtually stopped getting raises, and that assumes that people are still working.

Obviously the American worker's income is under incredible pressure, and this is translating to less buying. The tiny downward correction on the number of unemployed in the chart above is due to nearly half a million workers no longer being counted as unemployed despite not getting new jobs.

There is another element to the American consumer's balance sheet, and that is savings and debt.

While there has been a modest improvement in the debt servicing levels of the American consumer, there has been very little improvement for overall debt levels. This is a reflection of lower interest rates, not to debt actually being paid down.

The debt charts are beginning to move the right way, but they are nowhere near close to what can be considered "healthy".

The San Francisco Federal Reserve put it this way.

The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.

In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased.

On the other side of the coin is America's saving and investment.

These two charts are the most damning of all. Without saving and investing there can be no sustained economic recovery. Period. This is an absolute disaster.
Not only do these charts show no bottom, they are moving in the wrong direction at a worsening rate. Until these charts reverse the fundamentals of the economy will get worse.
The IMF summed up the situation this way.

Directors observed that the crisis will have important implications for the role of the United States in the global economy. The U.S. consumer is unlikely to play the role of global "buyer of last resort" -- suggesting that other regions will need to play an increased role in supporting global growth.

Not all of the economy is domestic. America does get some economic support from foreign trade.

There are signs that the rest of the world is starting to recover, but to benefit from that America will have to produce products that the rest of the world wants to buy. So far there has been no significant signs that this is happening.

Of course there is one more element of the economy that I haven't covered here, and it is booming!

Lately there has been some improved housing numbers, but there are several caveats to them. For starters, the marginal improvement in comparisons are to the disastrous selling season of mid-2008.

Secondly, 43% of all home sales last quarter were first-time home buyers. Normally that would be a good thing, but this time it is a reflection of the government's $8,000 tax credit that people are rushing to take advantage of. Some people are even using it as a down payment.
In case people have already forgotten, borrowers that require extraordinary help getting into a house are much more likely to default on their mortgages. It looks like an attempt at reinflating the housing bubble.

Finally, those small signs of price increases are due entirely to more expensive homes being forced onto the market.

The other positive economic number we've seen recently is in auto sales. This is due to the recently ended cash-for-clunkers program.

So the spiraling government debt and the two most positive economic numbers are directly linked. With that in mind you have to ask yourself, what will the economic recovery build upon?

Comments

[Humanistic]

I take an optimistic view. There's one thing that stands out for me: the massive amount of wealth that is now concentrated at the top, (no) thanks to tax policy and deregulation over the last several decades. Where are those billionaires going to put their money, besides Swiss bank accounts? Certainly not in Real Estate! I think this time the recovery will be fueled by investment, not consumption initially. Another poster mentioned energy conversion: bingo! I think energy and infrastructure investment will be the foundation for US economic expansion. It is part of the Stimulus and will continue to benefit from the Obama Administration's and Democrats' support. Clean energy alternatives will become our prized exports, and will gradually wean us off of imported oil. New legislation to come out of the Senate Finance Committee will tighten regulation as never before, which will help to direct the investor/broker community toward long-term productivity instead of short-term risk-profit. Once the wheels of production start to move, employment will rise. Much will have to be done to restore the well-being of the poor and middle class, partly through higher taxation of the rich. We the American consumers will have learned a lesson about spending, saving and debt, so we won't make the same mistakes again. It's going to be a tough road, but we'll make it!

[Chris de Vidal]

I asked Hale "Bonddad" Steward about Garrett's article:
http://bonddad.blogspot.com/2009/08/this-recession-is-over.html

(Scroll down to the comments. Also, something happened to the graph pictures overnight.)

[gjohnsit]

NDD is wrong. He says that things now are exactly the same as they were in 1982 and 1991.
That's not true by a long shot and NDD should know better.
To respond in kind, he says "exact same problems with failing banks and a huge commercial real estate bust in the 1990-1 recession". That much is true, but with one huge caveat: we are still at the beginning of the failing banks/commercial real estate bust.

Then there are the things he doesn't mention at all, like the savings rate being much lower today, while the debt levels are much higher (i.e. the biggest points of this article).
There's also the fact that the industrial base of this country was much stronger 20 years ago than it is today. And then there's the case that the government wasn't running such MASSIVE deficits in 1991. Oh sure, they seemed bad at the time, but the deficits today dwarf them.

[Henry]

When you take a look at the fundamental economy you have food, shelter, and clothing. Food producers are doing fine, home builders are wincing, and clothing is all imported. In the second level comes auto, medical, education, entertainment, and energy. Big shift in auto types, medical savings can be significant with getting rid of "free-rider" providers (med insurance), and energy can be gigantic with conversions to nat gas, solar, and wind.
An energy policy for this country needs to establish a date for no further oil imports and let the America enterprise continue.

[DonRoberto]

Excellent questions.

Tight and effective reregulation of credit cards, the banking and mortgage industries, telecommunications, and the healthcare insurance industry must all be part of any solution. These industries affect every nearly everyone; nearly every homeowner or taxpayer holds a bank account, pays on credit cards, worries about their medical insurance, and pays thru the nose for a phone, cable TV, or an Internet connection.

Until Americans are no longer victimized by the industries they interact with every day, there will be no retail spending, no reinvestment, and no broader recovery.

[andyg]

I try and have a effective reregulation, up and running before it applyed to anything, because infective reregulation is worse than no reregulation at all.

Because if you walk a tightrope without a net, you would put more care not fall, but with a net with a invisible hole in, your fall would be worse.

[jhNY]

As we have exported whatever manufacturing jobs we could pull up from the heartland and much of our remaining economy derives from making intangibles like financial instruments and phone apps, perhaps we should expect our recovery to come by way of a LBO on the debt teenagers have incurred as a class thanks to their downloading of said phone apps. But as Pops is broke, maybe even therein lies little hope.

[WorkingClass]

It beats me how the U.S. economy is going to expand with consumers broke and getting broker. Yet Hale Baghdad Stewart is on this same page saying you are a myth. Either way Goldman will be fine. That's good enough for me.