Thursday, 3 February 2011

An American mystery...

According to certain indices the US recovery seems pretty robust while others paint a slight different picture. If one looks at real personal consumption expenditures (taking inflation fluctuation into account) the index’s reading is higher than the pre-crisis level. I find that hard to grasp.

source: St. Louis Fed

Looking at series like Total Non-Farm payrolls, whose reading is way off the pre-crisis peak, is part of the reason. The same goes for Capacity Utilization for Total Industry. How can these two “realities” be combined?

After the Great Depression (1929) it took Real Personal Consumption Expenditures seven years to rise above the 1929 level. Of course the money poured in the US economy nowadays were probably a multiple of those back then, but how many of those measures directly affected the US consumer?

The debt burden of the consumers is in place and the unemployment is sky-high.
One possible driver I can think of is a possible reduction in savings (after the rise that savings rate posted after the onset of the crisis). At least that’s the way it seems in the last few months.

Another one is the rise in the stock market, which could cause the wealth effect that the FED is striving for, but even if that’s so could its impact be that strong?

If these are the reasons (which I find kind of difficult to believe) then it seems that the American consumer if following the old recipes that include consumption, consumption and even more consumption. If that is so then any deleveraging is bound to take place mostly through defaults. 

source: St. Louis Fed

source: St. Louis Fed

source: St. Louis Fed

On the other hand Revolving Credit Outstanding (i.e. credit card debt) continues to decline. Can this hefty decline be attributed entirely to defaults? I find that hard to believe. Something that I think of as possible is the following:

Not all people are benefiting from the stock prices rise, those that do, mostly upper and upper middle class, are jumping back on the consumption bandwagon. Those that don’t benefit in any way, continue to deleverage, either through default or through paying down debts.

Should this be true (and I could pretty easily be totally wrong here) then American society is getting more two-tracked as time goes by. This is never positive as rising inequality can lead to pretty nasty situations…

P.S. Falling Revolving Credit Outstanding may also be due to banks not renewing a fraction of credit cards that expire due to tightening credit standards (of course I don't know that I'm just speculating here). 

P.S.2: Well, it's obvious that this post has got me thinking, so here's another post-script, added one day after the original post. I had a conversation with a friend of mine and he told me that there is no way the wealth effect can be so big to induce such an increase in consumer spending all by itself. Then I had an epiphany that a lot of executive compensation is market-based (stock-option plans, free shares etc.). That constitutes an actual increase in wealth not just a traditional wealth effect. Besides, if what I'm reading on the net is right, bonuses are on the rise. Maybe these factors can go a bit further in explaining the rise in Personal Consumption Expenditures. I still cannot fully grasp how this increase occured though...

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