HOUSEHOLD BALANCE SHEETS AND THE RECOVERY
Pedro Amaral of the Cleveland Fed wrote an excellent piece in today’s “Economic Trends” on the state of the recovery and the cause of the slower than normal recovery. His conclusions are exactly in-line with my own: we are in a balance sheet recession that is largely caused by the implosion of the household balance sheet:
“The chart below shows the behavior of households’ (and nonprofit organizations’) net worth in the last six recessions. It is apparent that in the last two the damage to households’ balance sheets was both deeper with and more protracted than in the previous episodes. What was behind the drop in the latest recession? During this period, liabilities were roughly constant, so the drop happened because of declines in asset values caused by the real-estate collapse and the subsequent depreciation in financial assets. In the 2000 recession the drop was due to the stock market collapse. In contrast, in the twin recessions of the early 1980s, net worth never decreased, and in the early 1990s it dropped only about 2 percent.”
“The drops in household net worth help explain the protracted recoveries after the last two recessions. Personal consumption expenditures are the single biggest component of GDP at around 70 percent. If there is to be a solid recovery, consumption needs to increase at a substantially higher rate than the 1.7 percent it has averaged over the last year. But households are not going to start consuming at substantially higher rates until they have fixed their balance sheet problems. This is why the savings rate has been so high lately: Households are working hard at improving their wealth to income ratios at the expense of consumption. In previous recessions, since net worth did not fall by a substantial amount, this was not a problem. As incomes started growing again, consumption followed suit. Right now, an important part of that income growth is being channeled to savings. As the chart above illustrates, net worth is still well below prerecession levels and, barring an increase in asset prices (real-estate prices or stock market prices), the only way to increase it is by saving more and consuming less, further delaying the recovery.”
His conclusion, clearly, is similar to my own. We will not see above trend growth until the consumer balance sheet is fixed. We’re not there yet. What’s curious about this is that there are obviously economists in the Fed who acknowledge that this is a household debt problem yet policy is still not targeted on the actual problem….
Read the full piece here.
Well, at least there is one Fed member who is alert to the matter. Hopefully the concept will spread. . .
“What’s curious about this is that there are obviously economists in the Fed who acknowledge that this is a household debt problem yet policy is still not targeted on the actual problem”
I don’t think there’s anything curious about it at all. There may be Fed officials who know this, but what can they do that they haven’t already done? Even if they managed to bring down long rates would that matter? The baton needs to be passed to fiscal policy in the form of tax cuts, which the Fed can’t do, and the current Administration won’t because they’ve been itching to raise taxes since the day they set foot in the White House. They may make some token “targeted tax cuts” (to revive some classic Clintonspeak) in a desperate effort to stave off disaster at the polls, but this will not be an Administration known for cutting taxes. Rock…meet hard place.
I agree w/John. Other than asset swapping (QE) to continue shoring up Big Bank’s capital requirements, it is a fiscal action to repair the HH’s balance sheets.
And Warren Mosler’s FICA tax holiday (and, I think a wage tax freeze as well) becomes political suicide – since there are so many people concerned about the debt and the “fact” that we are “broke”, when, in truth, we are the sovereign owners of our fiat currency. If we could just see the solution, and then, as TPC has noted, get concerned w/ the debt when a recovery is underway.
Big rock, meet really, really big hard place…
Okay so I read the whole article by Pedro Amaral. In the first part of the article, he mentions that (despite the problems with household balance sheets) that “gross domestic purchases” grew at a rate of 4.9% in the third quarter. However, “GDP grew at a rate of only 1.6 percent” because imports “robbed” GDP of 3.3 percentage growth points.
So without imports, the U.S. economy would have a more normal, more robust economic recovery.
So it’s not really a “balance sheet” recession. It’s a “lunch box” recession. Imports are eating America’s lunch.
You’re extrapolating out based on one quarter. PCE has been well below trend over the last 8 quarters.
This is not about PCE. You expect the average consumer to be in trouble during a recession. Typically the government steps in with a spending program (stimulus) to kick start the economy. Chinese imports ate the stimulus. With the elections, the current gridlock in Washington will continue. There will be no new stimulus program. There is nothing left to lift the economy.