Punch line: As long as consumers (and companies) continue to deleverage, the economy will continue to sputter.
And, the deleveraging is likely to continue …
* * * * *
Excerpted from RCP :Why the Recovery Lags, by Robert Samuelson, August 30, 2010
The logic of Recovery Summer allegedly recognized that over-borrowed Americans would repay loans and replenish depleted savings, creating a temporary drop in consumer spending and economic activity.
But once savings increased and debt declined, consumer buying would strengthen. It would replace the Obama stimulus program. Hiring would improve; the recovery would become self-sustaining.
So, why is the recovery faltering?
There are many explanations: depressed housing; weaker-than-expected exports; cautious (rebellious?) corporations.
But consumers, representing 70 percent of the economy’s $14.5 trillion of spending, are the crux of the matter.
“Consumers are deleveraging (reducing debt) … and rebuilding saving faster than expected.”
In 2007, the personal savings rate (the share of after-tax income devoted to saving) was 2 percent. Now it’s about 6 percent. In the early 1980s, the savings rate averaged 10 percent.
The Federal Reserve reports that debt service — the share of income going to interest and principal payment — has decreased from almost 14 percent in early 2008 to about 12.5 percent, the lowest since 2000.
In the past decade, consumers counted rising stock and home wealth as “saving,” which rationalized high borrowing and spending.
Now, the process may work in reverse.
Since late 2007, lower home and stock values have shaved about $10 trillion from household wealth.
If Americans tried to replace most of this through more annual saving, consumer spending would remain weak for years.
Consumers are adopting a “defensive outlook,” they’re prone to “pare their debt” or increase “reserve” savings.
They aren’t “itching to resume old spending habits.”
Full article:
http://www.realclearpolitics.com/articles/2010/08/30/why_the_recovery_lags_106923.html
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