US consumption: From driver to dampener of world growth?
By Jon Fernquest
The
global economy may be on the
rebound
after having hit rock
bottom
earlier this year but a full
recovery
may still be far away, as
Bank of Thailand governor Dr. Tarisa noted this week: ...improvement
does not mean recovery...the problems of unemployment and wealth destruction
would
remain a drag on the global economy for some time. US spending, which
caused excess borrowing,
would change in terms of behaviour as households save more.
This would have a big impact on the global economy...as the US was the
world's largest consumer (Source: Bangkok Post, 08-05-09, link)
Eventually consumption in the US will enter a period of sustained growth again but this growth is likely to be weak in coming years for several reasons:
1.
Weak income growth
2. Depleted wealth
3. Tightened credit
2. Depleted wealth
3. Tightened credit
This is probably the biggest reason that Asia has to look inwards to find some new source of growth in producing goods for domestic demand (See Dani Rodrik on expanding domestic demand for industrial goods and William Easterly's rebuttal).
dampen - decrease
and make less, reduce intensity
dampener - something causing a decrease, causing reduced intensity
on the rebound - start to rise again after decline, success or improvement after failure (See glossary)
hit rock bottom - reached the lowest level
recovery - when the economy gets better (more jobs, higher incomes) การฟื้นฟูสภาพ
signs of X - things that happen that show X
signs of recovery - things that happen that show an economic recovery might be happening มีทีท่าว่าเศรษฐกิจจะกระเตื้องขึ้น
full recovery - when economic growth rises and unemployment returns to normal levels
partial recovery - when economic growth rises and unemployment improve but are still below normal levels
sustained growth - growth that continues for the long-term without declining
sporadic growth (opposite of sustained) - irregular growth (not regular sustained growth)
in coming years - in the future
depleted - used up and reduced, so that there is little or nothing remaining
tightened credit - reduced amount of loans available
dampener - something causing a decrease, causing reduced intensity
on the rebound - start to rise again after decline, success or improvement after failure (See glossary)
hit rock bottom - reached the lowest level
recovery - when the economy gets better (more jobs, higher incomes) การฟื้นฟูสภาพ
signs of X - things that happen that show X
signs of recovery - things that happen that show an economic recovery might be happening มีทีท่าว่าเศรษฐกิจจะกระเตื้องขึ้น
full recovery - when economic growth rises and unemployment returns to normal levels
partial recovery - when economic growth rises and unemployment improve but are still below normal levels
sustained growth - growth that continues for the long-term without declining
sporadic growth (opposite of sustained) - irregular growth (not regular sustained growth)
in coming years - in the future
depleted - used up and reduced, so that there is little or nothing remaining
tightened credit - reduced amount of loans available
US consumption up, savings down, household debt skyrockets (2000-2007)
Consumption has long driven economic growth both in the US and internationally:Since
the early
1980s, spending by
households on goods, services and homes has grown
faster than GDP, making it the locomotive of American—and
global—expansion. By 2006 it accounted for 76% of nominal GDP, the
highest since quarterly data begin in 1947... [See chart]
In the US savings has fallen and household debt has increased:
This
[increase in consumption] was accompanied by a steady decline in
the personal saving rate
and a
rise in household debt
relative to income. By itself, this was not a
problem; household debt has risen relative to income since the 1950s,
as a growing share of the population has taken out mortgages. Despite
the higher debt burden,
falling interest rates kept total household
financial obligations—interest
payments, rent and leases—within a range
during the 1980s and 1990s.
Starting in 2000 household debt skyrocketed:
An inflection-point
occurred
around 2000. Income
growth stagnated but debts continued to grow
rapidly, from 94% of income to 133% in 2007. The share of income
devoted to servicing those obligations also jumped. A
study in 2007 by
Karen
Dynan and Donald Kohn, both of the Fed, attributed that partly to
more of the population
reaching home-buying age, and mostly to a rise
in home prices which made it possible to borrow more. (Source:
Economist, 07-05-09, link)
the locomotive of American -- and global -- expansion - the thing or factor that drives or causes expansion
GDP, Gross Domestic product - a measure of economic activity in a country, the value of the country's output of goods and services. GDP is defined roughly as: GDP = Household Consumption + Business Investment + Change in Inventories + (Government Spending - Taxes) + (Exports - Imports) (See Economist Glossary)
nominal GDP - level of GDP before adjustment
real GDP - GDP adjusted for inflation so that it be compared with prior years, so it shows the goods that GDP "really" buys
a steady decline - falling at the same speed over a long period of time (not jumping up and down like a rabbit)
personal saving rate - the percentage of their income that households save
household debt - money that households borrow and must pay back
a burden - a difficult thing that must be done, a heavy load to carry, a responsibility
higher debt burden - more borrowed money that must be paid back in the future
an obligation - something that you must do, something you promised to do
financial obligations - money that must be paid to people in the future (that you agreed and promised to pay)
skyrocketed - increase very quickly (like a rocket shooting up into the air)
inflection-point - a point were an important change happens
stagnate - stop moving forward, changing and progressing
income growth stagnated - income stopped growing and improving
share of income devoted to servicing those obligations
attributed part of X to Y - explained part of X by Y
US households having become very highly indebted relative to their income and assets.
The US financial sector fueled this trend towards low savings and heavy debt by creating ever new ways for consumers to borrow against their home equity, from credit cards for borrowers with low credit ratings to home refinancings that delivered cash to borrowers (Read article):
"The
ratio of total household debt to aggregate personal income in the
United States has risen from an average of 0.6 in the 1980s to an
average of 1.0 so far this decade...Households have become more exposed
to shocks to asset prices through the greater leverage in their balance
sheets, and more exposed to unexpected changes in income and interest
rates because of higher debt payments relative to income."
(See article on household
balance sheets)
These days seem to be over now and the negative "wealth effect" may reduce consumption by as much as 2% per year.
Consumers will be forced to shift from spending to saving (Read NY Times article).
Consumers will be forced to reduce their debt and increase the amount they save:
A
more enduring restraint
will be the
pressure on consumers to reduce their debts to more manageable levels
relative both to income and to the much lower value of their homes.
This effect is difficult
to quantify, since so many factors determine
consumers’ preferred saving
rates and levels of debt: assets,
retirement goals, expected income, risk tolerance, access to credit,
age, and so on. Some bearish
analysts argue that debt
ratios and saving
rates ought to return to their levels of the early 1950s, but others
reckon it
would be enough to go back to 2000 for households to feel
comfortable with their debts again.
This process, known as deleveraging, requires consumption to grow more slowly than income in coming years. A sudden rush to return debt ratios to where they were in 2000 would require ridding households of some $3 trillion in mortgage debt—an almost impossible task. More probably, mortgage debt will grow more slowly than income through a combination of lenders writing off impaired loans, homeowners paying down existing mortgages and new homeowners taking out smaller mortgages than in the past... (Source: Economist, 07-05-09, link)
This process, known as deleveraging, requires consumption to grow more slowly than income in coming years. A sudden rush to return debt ratios to where they were in 2000 would require ridding households of some $3 trillion in mortgage debt—an almost impossible task. More probably, mortgage debt will grow more slowly than income through a combination of lenders writing off impaired loans, homeowners paying down existing mortgages and new homeowners taking out smaller mortgages than in the past... (Source: Economist, 07-05-09, link)
enduring - lasting for a long time
restraint - something that prevents action (here spending money, consumption)
manageable levels - levels that can be controlled and dealt with, not out of control
difficult to quantify - difficult to measure
preferred - the one that they like more than others
a bear market - when stocks are losing value, stock prices falling
a bull market - when stocks are increasing value, stock prices are increasing
bearish analysts - stock experts who believe there will be a bear market in the future
debt ratios - debt as a percentage of assets (shows how much of assets are bought with borrowed money)
leverage (noun) - borrowing money to buy an asset (for example, paying 30% of the price of a house down and borrowing the rest (70%0))
deleveraging - reducing the amount of borrowing
ridding X of Y - taking X away from Y
write off - acknowledgment of a loss, the decision by a company that they will never recover what they spent on something (an investment, a loan) so they take the whole loss now, rather than painfully taking it over a long period in the future, this allows them eventually to start over again (See glossary)
impaired loans - loans with a borrower having trouble paying it back (not paying it back at all or paying it back too slowly)
writing off impaired loans - accepting the fact that the loan will never get better and recording it as a loss (this will reduce profits for the bank but free up the money to be loaned to others)
paying down existing mortgages - reducing the amount borrowed for your house (principal)
