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.

Another bleak Greek post...

I was looking at Greece’s International Investment Position. I realized that Greece has become a positive net foreign direct investor. That development, in the largest part, can be attributed on the exodus of foreign fixed capital from the country. Watch, the trajectory of foreign residents investments in Greece after the sovereign debt crisis broke out. Here’s the graph.

source: Bank of Greece

Probably, the decline in foreign residents investments in Greece will go on for a while, until some of them will probably rush in to take advantage of the dirt cheap valuations. Of course, only after visibility about the situation on Greece has increased, so this could be a few years down the road. Even then, market entrance won't be easy since the remaining players will have gained significant market power. Maybe the planned privatizations will go some way into bringing foreign capital into Greece, but they will do nothing into creating new jobs. They will probably have the inverse effect since cutbacks are most definitely in order… 

On the other hand there is an opposite-direction effect building with Greek firms being forced to sell or close down operations abroad due to financial distress. Maybe this will make sure that the net direct investments positions hovers at the zero limit.

I don’t think that there is a positive catalyst for job creation in the horizon…

Is it wise to remove liquidity right now ?

All this talk about ECB raising rates or withdrawing emergency liquidity seems kind of absurd to me when one ponders the situation that Europe is facing. The two banking sectors more dependent on ECB liquidity is those of Greece and Ireland. The following charts are based on the aggregate balance sheet of the two countries’ banking sectors.

source: Bank of Greece, own calculations

source: Central Bank of Ireland, own calculations

Do those charts give you the impression that these two banking sectors can replace these funds with some from another source ? I don’t know, I’m just asking here…

Could it be that the ECB is once again paying no attention to the peripheral countries? Or is Europe bluffing to prevent "uncooperative" behaviour by the periphery? Of course this is what some conspiracy theorists could be thinking and it's not in any case what I believe...

What's next...?

The EU/IMF block is applying pressure to the Greek government for further and admittedly, sizable reductions in state wages and pensions. Furthermore, at the same time, we are constantly being brainstormed by various sources that the state payment plans underwent a huge slashing. But is this true?

source: Hellenic Ministry of Finance

The overall funds channeled at wages and pension payments were indeed cut, as you can see from the chart above. But, the imposed cuts were not that huge. Maybe, they were not optimally distributed between low-income and high-income workers and pensioners, but I am no expert to judge that. I cannot go into that much detail here, since I lack relevant data. But if we want to stand a chance at achieving at least a primary surplus, then more (and unfortunately much larger) cuts are needed.

When the projected reduction in overall payments for wages and pensions was just 2,06% (if we take figures published into the 2011 state budget) in 2011, maybe we get a whiff of the reason that the “Troika” is asking for more cuts.

I have to say that the way that the state budget is calculated underwent a radical change and comparisons between figures before and after the adjustment are difficult (at least for me). End of the parenthesis.

source: Hellenic Ministry of Finance

Some figures though remain easy to compare. An important ratio for sovereign budgets is interest paid / revenues. The rise of the said ratio above some (not so certain) threshold makes the servicing of the sovereign debt impossible. For Greece that particular ratio is already pretty elevated but the said threshold would have been surpassed long ago (I think that it already has been surpassed), if Greece wasn't able to borrow on unreasonably narrow spreads over Germany (Bunds are considered to be the benchmark bonds for Europe) for the whole past decade, due to the excess liquidity floating around back then (I am not buying the convergence argument). 

source: Hellenic Ministry of Finance

Another ratio closely watched should be wages and pensions payments / revenues. This should be considered important since it displays the government's ability to continue paying wages and pensions if it goes bankrupt, something that can help avert various unfortunate situations.

source:Hellenic Ministry of Finance

As we can see, the already undertaken wage-slashing has helped improve the ratio, but is this sustainable? Well, no, since this isn't the whole story. A large part of the adjustment is due to the excess taxing of both the household and the corporate sector, I suspect that the "Troika" would lke the adjustment to stem from reductions in public spending.


On the other hand, it is obvious that the Troika’s representatives display a severe lack of political skills and understanding of the Greek culture and the Greek people psyche, something that makes things more difficult.

It is obvious that right now, there are no esy solutions for Greece. Headroom for more adjustment through taxation has run out, as I had indicated in an older post. The only way forward, should the government want to go on with the fiscal adjustment is to make spending cuts, which means either more wage cuts or lay-offs or most likely both.

Certain international factors complicate things even further:

The fact that there are disruptions in oil supplies from riots (or civil war if you prefer) in Libya and the coming inflationary pressures, that will go some way into deepening the Greek depression, could make EU/IMF officers a bit more flexible and understanding. Now, shouldn’t it?

Also, the fact that contagion from Arabic countries could spread to Greece, which surely has a pretty colorful past, as far as civil unrest is concerned. Of course, there was nothing like what is going in the Arabic countries presently, but then the current situation in Greece has nothing to do with we had the last 30+ years.

Last but not least, Mrs. Merkel's party defeat at Hamburg's local elections makes things even harder and the chances of Greece piggybacking on Ireland to achieve more favorable terms in the IMF / EU loan package, are pretty slim, since the EU / IMF block know that they would be setting a precedent.

Things can get pretty messy and some really delicate political and economic balancing is needed, something that the Europeans have not displayed a talent for since the start of the sovereign debt crisis…