Other than what’s happening overseas, few topics have been more thoroughly scrutinised recently than the relationship between housing market activity, deleveraging and the US consumer.
James Hamilton tackled this in a post yesterday explaining the impact that sluggish spending on housing and autos is exerting on economic growth, and it reminded us of this series of charts sent to us last week by Credit Suisse economists:
The economists note that after a big decline during the recession, purchases of many smaller-ticket items are nearly back to where they would have been if pre-crisis trends had continued uninterrupted. But as you can see in the second chart above, nothing like this has happened for bigger items (and you can obviously stick housing into this category as well).
They also suggest that this indicates a certain amount of pent-up demand for these items, which you’d expect given high unemployment and low household formation. The same goes for the big shortfall in services consumption.
Some commentary from Credit Suisse:
Where consumption is held back, it is mostly the direct result of high unemployment and weak growth in the number of households. Expenditure directly related to the number of workers – like that on insurance, legal and accounting services, or certain financial services – remains weak. Expenditure on big ticket items, especially things related to housing, also remains weak. Furniture, automobiles, and other durables are below replacement rates and represent significant pent-up demand. Direct spending on housing will improve with falling vacancy rates of housing units (household formation); this is a major potential tailwind for future spending.
Consumption has been stronger for small discretionary items, especially the types of items people with jobs buy on their days off, such as technology products or movie tickets. Spending patterns show no deep change in consumer behavior such as purposeful deleveraging. Households in the main don’t seem to be taking new steps to protect themselves against the contingencies of life, like old age. Voluntary saving seems less likely the explanation for recent consumption patterns than the simpler hypothesis of an absence of the categories of spending one would expect when jobs are scarce and the creation of new households has slumped.
A large chunk of the huge services sector has barely grown since 2006. Weakness here is driven by low rates of household formation and low employment levels, which cut into expenditure on things like insurance. … These components are among the most significant drivers of the wide output gap.
The economists think this will lead to a big windfall in spending as jobs growth gradually picks up, but at the current pace this might take a while.
And in a good column out today, James Suroweicki has a slightly different view. Citing work by economist Robert Hall, Surowicki writes that to the extent that consumer spending hasn’t been stronger, it’s as much to do with the big fall in home equity and its disproportionately large wealth effect, which we discussed last week.
The real estate wealth effect, when home prices were spiking during the bubble years, led Americans to ramp up their spending on these big items, and the effect on the way down has had a reverse but similarly powerful effect.
Here’s Suroweicki:
Indeed, one simple reason Americans have been spending less on cars and durable goods is that, as the economist Robert Hall has shown, their spending on these things during the bubble was extraordinarily, unnaturally high. If we’ve been buying fewer cars and washing machines, it’s in part because we’ve been working off the overhang from the bubble years.
The conclusion: consumers have actually been doing about as much as can be expected of them. Which means it’s unlikely that we can expect them to generate the kind of catch-up growth necessary to meaningfully lower unemployment.
That would have to come from elsewhere. What’s the elsewhere? Suroweicki again:
This time around, business, export markets, and, especially, the government need to do what consumers can’t.
But businesses are unlikely to provide the kind of investment in hiring and equipment necessary to provide a spurt of catch-up growth either. It’s possible that they’ve reached the limits of how much productivity they can squeeze out of their workers and will start hiring more, but ultimately they too are reliant on the US consumer.
Exports could help a bit and, indeed, at some point a measure of current account rebalancing should be a helpful part of the recovery. But trade is a relatively small part of the US economy and won’t provide anything like the boost needed to close the US output gap.
In the end, meaningful short-term growth would have to come from counter-cyclical fiscal policy. But because of the debate over the debt ceiling earlier this year, policy has been constrained and is likely to remain so at least through next year’s election. And given that fiscal policy will be a drag on the US economy by next year, that’s one reason for our stayed optimism over recent signs that the US economy has been improving.
Full note from Credit Suisse in the usual place.
Related links:
Another look back at housing and deleveraging – FT Alphaville
Demographics and destiny, US housing edition – FT Alphaville