U.S. recovery – a mixed scorecard
Ultra-low interest rates and massive liquidity injections have acted like a painkiller, stabilising the U.S. economy and preventing it from going into shock. But they have not cured the underlying problem of over-extended households and an economy dependent on increasing consumer indebtedness as its main source of growth.
The result is a highly uneven recovery. While many parts of the manufacturing and the service sectors are rebounding strongly, those most dependent on credit, particularly housing and autos, and others associated with them such as home furnishing remain depressed.
Low rates have largely solved the cash flow problem, at least for households that have remained in employment. But household balance sheets are still undergoing what is likely to be a long and painful period of adjustment that will continue to act as a drag on credit-driven spending for several more years.
It is not clear monetary or fiscal policy can help much more in these areas. It was precisely overspending on cars and homes that got U.S. consumers into such a disastrous financial position during the mid and late 2000s.
Households have no real income growth to finance renewed spending on big ticket items and lack the confidence needed to take on much more debt to finance extra consumption. Even if confidence somehow recovered, most lenders remain wary about the poor creditworthiness of potential borrowers and the weak state of their balance sheets.
NO BIG TICKET SPENDING
The charts show spending in nominal terms; changes are a mixture of volume and price adjustments. But this is an accurate reflection of the pressure on different sectors, because it is nominal prices that have affected manufacturers’ cash flow.
Personal consumption was actually $704 billion higher in nominal terms in Q1 2010 than it had been three years earlier, according to government data.
But almost all of the increase was on services such as healthcare, housing and utilities and finance and insurance.
Spending on goods is $100 billion higher than in 2007. But while spending on non-durable items intended to last three years or less has risen moderately, spending on durables is significantly lower.
Almost all categories of consumer spending have risen over the last three years, at least in nominal terms, despite the recession. But three show declines: motor vehicles, furnishing and durable household equipment and clothing.
Depressed spending on housing and vehicle-related items corresponds to the weakest parts of the economy.
Overall performance, as measured by container movements on the country’s railroads, has rebounded strongly since mid-2009 in a classic V-shaped recovery. In recent weeks, container movements have hit or exceeded pre-recession levels (Chart 3). The overall picture is also improving (Chart 4).
Poor demand for motor vehicles is mirrored in auto-lending data. The volume of outstanding auto loans and leases by finance companies to consumers continues to decline as old loans run off and new ones are extended at a slower rate.
The volume of outstanding auto loans and leases has fallen by almost a third since peaking in September 2007 and now stands at its lowest since July 2000 even before allowing for inflation (Chart 7).
The same story about uneven sectoral performance is evident in capacity utilisation estimates compiled by the Federal Reserve.
Capacity use in crude basic materials industries including natural gas and oil production, chemicals and mining has rebounded and is now above its long-term (1972-2009) average.
But there is still huge excess capacity further down the value chain in semi-finished and finished goods processing, especially in industries closely associated with housing, autos and big-ticket consumer items (Chart 8).
The overall recovery looks fairly secure and set to continue. It is already stronger and more sustained than the last expansion in 2002-2003.
But it will remain highly uneven, encumbered by the legacy of indebtedness and wariness about borrowing and lending inherited from the collapse of the credit bubble. The problems in autos and housing look structural and will take several years to work through.
In this context, equity and commodity markets are right to be wary about the outlook and fearful that the rapid recovery witnessed in the last 12 months will give way to a more moderate expansion over the next year.
(Editing by Jane Baird)