The U.S. consumer might be the engine of global growth — just not the roaring V12 it used to be.
From the fourth quarter of 2003 through 2006, amid the real estate bubble, personal consumption expenditures grew at an average annual clip of 3.5 percent. Since the S&P/Case-Shiller Composite 20-City Home Price Index bottomed out in March 2012, however, personal consumption expenditures have increased by just 2.3 percent, on average.
In an economic letter published by the Federal Reserve Bank of Dallas, economists John Duca, Anthony Murphy, and Elizabeth Organ identify one reason why this American muscle car has lost its nitrous oxide.
The researchers found that the wealth effect from real estate — that is, the extent to which home price appreciation juices consumer spending — has been cut in half since the mid-2000s:
Janet Yellen’s Federal Reserve can only be concerned by this data. Yes, a slower rate of house price appreciation is still positive and far better for consumer spending than a slump. Nevertheless, despite the very favourable effect of a somewhat weaker US Dollar, the US economic recovery remains modest and far from self-sustaining. Therefore, a rate hike in June would be far more risky than beneficial.
Yes, inflation has edged higher in line with the rally in commodities, including the Bloomberg Precious Metals SubIndex and the MSCI-World Energy Index, but deflation has been the big fear, and obviously not just for central banks. Consumers cut spending in a deflationary environment, even if they have ample funds, because they know that prices could easily be lower over the medium to longer term.
Quite unlike the second half of the 20th Century, I think the Fed should now err on the side of inflation, not least because the accelerating rate of technological innovation and global competition are powerful disinflationary forces. A recession in the US economy anytime soon would have significant global implications. It would also hammer Wall Street, where leading indices such as the DJIA are short-term overbought near the upper side of their ranges and not that cheap with a P/E of 16.81 and Yield of 2.53%. Most other US indices are considerably more expensive.Back to top