What’s Really Behind the Sluggish Economic Recovery
By now, it’s old news that the first quarter (Q1) represented another quarter in which the U.S. economy contracted, the third such quarter since the recovery began.
Investors and economists initially blamed the Q1 slowdown on one-off factors: everything from the weather to flaws in the way the government accounts for seasonal fluctuations. Unfortunately, if it was all about a rough winter or statistical flaws at the Department of Labor, we would be seeing a robust rebound in the second quarter (Q2). We’re not.
While the economy is improving, the rate of improvement is much lower than economists had expected. In recent months, estimates for Q2 gross domestic product (GDP) have collapsed to 2.5% from 3.2%.
To my mind, the reason we’re not seeing a more convincing recovery lies largely with the consumer. While firmer wages and lower gasoline suggest that the consumer has the ability to spend, what consumers lack is the propensity to spend. Instead of spending, more are saving. Since October, the U.S. savings rate has climbed by a full percentage point. This trend is likely to continue for these reasons.
The crisis aftershock.
While economists tell us the recession is long since over, for many households the financial crisis left a serious scar. This is consistent with history. Looking at the aftermath of previous debt bubbles, Carmen Reinhart and Kenneth Rogoff found that the hangover is deep and long lasting. Growth was more than 1 percentage point lower relative to normal periods, and the average duration of the overhang was 23 years.
Debt is still too high.
In previous posts, I’ve made the argument that consumer debt, particularly for middle-income households, is still too high. And while it’s true that household wealth is at a record, the wealth effect is concentrated at the top of the income distribution, where individuals have the lowest propensity to spend. For most middle income households, the stock market rally has not materially impacted their sense of financial well-being.
Families are under saved for an increasingly long retirement.
Many households have yet to recover from the last crisis, and they are now being confronted with a new challenge: a very long retirement in the context of very low rates. Today, the pool of savings necessary to generate a given level of income needs to be higher than in the past, a situation compounded by the decline in defined benefit pension plans.
Where does this leave the economy and the consumer? On a short-term basis, consumers are in decent shape, with wages stabilizing, interest rates low and gasoline cheaper.
But over the long term, households need to up their savings. I believe this is a large part of the reason why consumers have been reluctant to splurge. While a 5.6% savings rate seems high in the context of the recent past, it’s important to remember that prior to the consumption binge of the late 1990s, the savings rate averaged roughly 10%. When you factor in an older population coming to grips with an unprecedented retirement challenge, it’s easy to envision the savings rate needing to rise for many, many years.
Ultimately, a higher savings rate will be a positive development, but it will not help those looking for a quicker, stronger recovery.
Source: Bloomberg, BlackRock research
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