The depth and breath of the recession will be tied closely to the behavior of the US consumer. Their actions in the next few months will determine whether we will see the positive growth that was expected at the end of the year. Stimulus is important but what the consumer does with the stimulus is more important. Their actions determine the multiplier effect. If we look at the data, the course is clear. We will not get the multiplier effect from consumers. Consumers are cutting up their credit card. The growth of consumer credit is negative. This what we have seen in other business cycle and we should expect this to continue. There is no change in their behavior on this count.
What is also happening is that consumers are saving more. The savings rate is shooting up like a rocket. The savings rate is still less than what we saw a decade ago and still below the long-term average. Still consumers are placing their money in mattresses whether it is coming from earnings or from government tax cuts. Consumers want to replenish wealth especially if they are closing in on retirement.
The question is whether the government dissavings is just offsetting the decline in consumer debt activity or whether it will cause a change in consumer behavior to actually spend more. The government is sending a mixed message. No savings for the government which is the Keynesian policy story and the correct policy for the Paradox of Thrift. But there is an added burden in this whole process of recovery. Consumers are supposed to change life styles to become healthy energy conservers who eat less and behave better and not spend money. How is all of this going to happen and still create above trend growth?
What is also happening is that consumers are saving more. The savings rate is shooting up like a rocket. The savings rate is still less than what we saw a decade ago and still below the long-term average. Still consumers are placing their money in mattresses whether it is coming from earnings or from government tax cuts. Consumers want to replenish wealth especially if they are closing in on retirement.
The question is whether the government dissavings is just offsetting the decline in consumer debt activity or whether it will cause a change in consumer behavior to actually spend more. The government is sending a mixed message. No savings for the government which is the Keynesian policy story and the correct policy for the Paradox of Thrift. But there is an added burden in this whole process of recovery. Consumers are supposed to change life styles to become healthy energy conservers who eat less and behave better and not spend money. How is all of this going to happen and still create above trend growth?
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