THE behaviour of American consumers has been rather confounding of late. Early in the year, retail sales were surprisingly strong, even as labour markets remained exceedingly weak. Recently, however, retail numbers have disappointed despite declines in household savings rates. Analysts, meanwhile, can't figure out what they want consumers to do. American household saving has to go up at some point; excessive borrowing drove the crisis from which the world is only now emerging. And yet, there is precious little holding the American economy up. If consumers don't keep spending, it's not clear where new economic growth may come from.
In a new piece of analysis, Goldman Sachs' Jan Hatzius offers an explanation for the mixed signals. Positive spending numbers have been an aberration as American households have actually gone through a much larger retrenchment than savings rates indicate.
The key is to take into account the total household budget picture, rather than just income and outlays. Households consider housing wealth as part of their budgeting decisions, and the picture there is one of a much larger retrenchment. Businesses have also pulled back sharply, and as businesses are ultimately owned by households, this measure should be included in considering household financial positions. All told, the private sector has undergone a saving swing of 11 percentage points of GDP, from -3.7% to +6.8%. Private sector balances in America are now well above the historical norm.
This is encouraging, right? Not only are we seeing the private balance shift we'd expect, but the size of the retrenchment indicates that things may have overshot, and households and businesses may soon begin contributing more to economic activity.
Not so, says Mr Hatzius. Recent historical experience indicates that post-crisis deleveraging in developed nations takes a while. Private sector balances in post-crisis Spain (late 1970s), Norway (late 1980s), Sweden, Finland, and Japan (all early 1990s) remained at very high levels for nearly a decade after the crisis. Given the amount of debt Americans have to work off, the pattern seems likely to repeat.
So what will this mean? We've seen retail data falter in recent months. The housing sector will continue to stagnate in the absence of government support. Federal stimulus will cease to support activity in the second half of this year, and state and local governments continue to place a drag on output. The boost from inventory adjustment is essentially over. And European crisis and policy tightening in emerging markets mean that the prospects for growth in external demand have weakened. The American economy is looking at a number of years of wheezy sideways movement.
Where it gets really ugly is the part where Goldman projects the effect of this sidling on labour markets. According to the latest analysis, unemployment is forecast to be more or less unchanged from its current level at the end of 2011. In the fourth quarter of 2011, says Goldman, the unemployment rate will be 9.7%.
Maybe that's too pessimistic. One hopes so. The outrage among the voting public given no improvement in the unemployment rate in over two years is sure to be intense. And such outrage can be channeled in many different, and mostly unpleasant, directions. It's no surprise then that President Obama is increasing the pressure on Congress to take more steps to support the labour market. Unfortunately for American workers, 9.7% unemployment at the dawn of 2012 is the best thing that could happen to Republican fortunes, and the president needs Republican votes to move legislation. The next two years could prove very ugly indeed.
(Economist Blog, June 14, 2010)