American Consumer Vitality Turns on Who is Right, Harvard or Yale
Comment of the Day

January 24 2014

Commentary by David Fuller

American Consumer Vitality Turns on Who is Right, Harvard or Yale

Here is the opening from this relevant and topical article by Jeanna Smialek for Bloomberg: 

The American consumer’s readiness to kick the economy into high gear comes down to a question of who’s right: Yale’s Stephen Roach or Harvard’s Martin Feldstein.

To Roach, Americans are still working to rebuild savings and will be slow to increase spending as long as wage growth is sluggish and household debt exceeds long-run averages. “We have a long, long way to go,” says Roach, 68, a senior fellow at Yale University’s Jackson Institute of Global Affairs in New Haven, Connecticut, and former chairman for Morgan Stanley Asia.

Over at Harvard University in Cambridge, Massachusetts, Feldstein, 74, predicts “we finally are going to see a good year in 2014,” thanks to stock-market and home-price gains that have boosted household wealth and given consumers the confidence to spend.

Which view proves true will have a lot to do with whether consumer spending, which constitutes about 70 percent of the U.S. economy, makes this the break-out year for the expansion. Consumption gained momentum in 2013, and more vigor this year could spur still-hesitant businesses to hire and invest, augmenting growth.

David Fuller's view

These are interesting points and my own view is marginally more in line with Martin Feldstein.  However, one has to be careful about generalisations.  For instance, wealthy people who earn much of their income from the stock market or a successful company now have few qualms about spending.  Others who have most of their wealth in a nice home on which they are paying a mortgage are now feeling less anxious.

However, middleclass families (this has become a euphemism in the USA for anyone who is not comfortably well off) are struggling because their salaries have not kept up with the cost of living.  This is the majority of the population which is still trying to reduce debt and increase savings.  It is a struggle because technological innovation is making jobs less secure by replacing them more quickly than new jobs can be created.  Additionally, while globalisation will contribute to stronger global GDP growth over the longer term, it inevitably reduces wage disparity between developed economies and the faster growing emerging nations. 

Meanwhile, it is approximately five years since the depth of the credit crisis recession in 4Q 2008, at least as anticipated by stock markets.  It usually takes longer for economies to recover from these difficult recessions which simultaneously curb both consumer and corporate spending.  This reduces tax receipts and increases government debt, leaving the three interconnected engines of the economy in stall prior to a very slow recovery.  This recovery, as investors have seen, is led by stock markets, and revealed first in corporate balance sheets, well in advance of improving household and government finances.   

The consumer, which the article above is mainly about, will be affected by sentiment which is gradually improving.  Hopefully, this will not be damaged by Wall Street’s stock market correction which has commenced.  

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