Tuesday, 8 March 2011

A macro look at the infamous US consumer...

I like to check-out stats first-hand and when writing a post I prefer to have some statistical points to back it up, but all you brave people reading my posts already know this. Today my quest for stats brought US GDP data on my screen.

I am still surprised that there is a recovery in the US, however weak it may be, with unemployment that high. So I thought that to check data for the most recent recessions and subsequent recoveries in the US, to see what the contribution of private consumption is. I’m going to flood you with charts now, so brace yourselves.

source: Bureau of Economic Analysis

There were three recessions during the 1970s-early 1980s (Nov 1973 – Mar 1975, Jan 1980 –July 1980, July 1981 – Nov 1982). The first and last were followed by relatively robust private consumption contributions in real GDP.

source: Bureau of Economic Analysis

The most interesting though is the double-dip recession of 1980-1982, which bears some similarities with the current situation. After the brief 1980 recession, there was an also brief interval of positive growth, where unemployment was high and private consumption was weak, then the new recession kicked in. The trigger for the new recession was a spike in oil prices due to unrest in the M. East and a tightening of monetary policy due to inflation fears. Ring any bells ?

Of course, I don’t think that there is any realistic chance of tightening in the US right now, but what about Europe? Could the fact that Moody’s downgraded Greece act as a game-changer that averts tightening? What will the effect of all these to the US be? Let’s wait and see...

source: Bureau of Economic Analysis

After the early 1990s recession private consumption staged a quite satisfactory recovery but it already was a bit more subdued relative to the previous two pictured here. The almost parabolic build-up of consumer debt starts at about that time and allows American consumers to live beyond their means.

source: Bureau of Economic Analysis

The bursting of the dot.com bubble would have been the endgame for the American consumer but the policy of easy money that resulted in the continuation of the consumer debt build-up and the housing bubble gave them a few more years to continue their reckless spending habits.

source: Bureau of Economic Analysis

The current situation bears many similarities to the time between the double dip recession of the early 80s. Let’s see what will follow since, globally, things are a bit shaky and the current recovery appears (at least in my eyes) to be quite fragile… 

P.S. As an end-note I would like to add a chart showing the overall contribution of private consumption to real GDP growth in the US.

source: Bureau of Economic Analysis
When I look at the chart I get the impression, that since the 90s, the US consumer seems to be “maxed out”. The fact that the build-up in consumer debt started to go parabolic during the 90s surely cannot be dismissed as coincidental. As the years went by, slowly this downward trend continued. The only blips were the wealth effect of the late 90s just before the dot.com bubble burst and the wealth effect owed to the housing bubble just after the mid 00s (along with home-equity loans that allowed people to capitalize on that effect without selling their house).

P.S.2. I re-read the post and I think that I wasn't clear about the point I wanted to make, so here's a little clarification. I refer to private consumption contribution to real GDP growth as an absolute number (i.e. not compared to other real GDP growth drivers). This means that in fact the US has entered a period of lower trend growth...

Recessions timeline drawn from wikipedia.

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