by Gene D. Balas
In a recent column, we discussed a very challenging headwind to the economies of most developed regions: that of an aging population, as people eventually reduce their spending habits as retirement approaches or progresses. That column reaches a perhaps dour conclusion, but to be clear, the economy generally really does want to grow. It’s just that those headwinds may limit how fast growth can accelerate.
With that backdrop, let’s take a look at some reasons why there are countervailing forces propelling the economy ahead, even if it is at a moderate pace and below what we may have become accustomed to in decades past.
Consumers have experienced growing earnings net of inflation
Consider the U.S. consumer, our focus in this article. Much has been said about weak wage gains during the recovery, but one must also consider the purchasing power of those paychecks. With inflation at ultra-low levels, even a modest pay raise in inflation-adjusted terms might leave workers better off than a bigger pay raise (but with even higher price increases). Consider the nearby graph on real weekly median wage gains, which shows relatively decent after-inflation income growth in very recent years.
Consumers are in a better mood
Next, we might see if consumers are in a mood to spend. We can turn to survey data for that. While there are limitations as to whether these data can be definitively and quantitatively linked to actual spending patterns, a delve into consumer sentiment is constructive nonetheless. And what we see are consumers that about as confident as they were in previous expansions, during the 1980s, the 1990s and the 2000s, looking at the periods in between recessions.
Consumers’ debt burdens are below those in decades past
What about debt service levels? Are consumers burdened with excessive credit card or auto loan debt? The answer is no, when looking at non-mortgage debt service payments as a percentage of disposable income, thanks in large part to low interest rates that keeps payments lower for a given level of debt.
Consumers can spend more on discretionary purchases
That gives them the wherewithal to buy cars and other big ticket items, as seen in the nearby graph. Cars are a more discretionary purchase, unlike a housing unit, which is more of a necessity, be it a single family home or an apartment, so we’ll focus on auto purchases here.
How much of this is likely due to the Fed’s actions? It’s difficult to say with exact precision. One factor helping credit-dependent purchases, like cars and houses, is low interest rates. And the funds from the Fed’s bond purchase programs did flow into other asset classes, boosting stock returns, making some households feel wealthier and thus more likely to spend. (Perhaps with growing 401(k) balances or other portfolio values rising, some households may have felt less of a need to save out of their paychecks, even if they didn’t sell assets outright.)
Still, the headwinds are real and consumer spending has decelerated from recent decades
But like we mentioned in our earlier post, headwinds do remain. If you look at the graphics presented above, you may notice that consumer sentiment as well as car sales, to name just two variables, have yet to meaningfully surpass their pre-recession peaks. That means there is still work to be done. After all, consider consumer spending more broadly, net of inflation. In the nearby graph, observe that real personal spending growth over twelve month periods since the recession ended is lower than in the 1970s, 1980s, 1990s and even the 2000s.
Weighing the data helps set realistic expectations
So, if you believe the recovery has been weak (at least measured from the lens of the consumer, as we’ve discussed in this column), you’re not altogether wrong. But it is important to consider what is within the realm of possibility. For the economy to grow at the same robust pace it had in decades past, as we discussed in our previous column, demographics are one big limitation. The Fed and elected policymakers can do precious little to reverse the tide of an aging population, and these data reinforce those points we made in that column.
But we would also be remiss to discard the notion that the economy isn’t growing by at least a moderate pace. The economy does want to grow, after all. However, having realistic, balanced assessments of how the economy is faring, tempered by a view on what reasonable expectations might be in the future, are essential.
Disclosures
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