A great expansion?
A long hurrah for the US expansion as steady she goes. This week the current US economic expansion, which started in June 2009, surpassed 120 months, thereby taking the first place from the 1991-2001 Clinton-era boom as longest post WWII period of economic growth without the US economy entering a recession. It has also been one of the most stable expansions with low volatility in economic growth, which has been beneficial for a strong rerating of risky assets. Trump claimed on Twitter this economy is ‘the best it has ever been’.
Really? Looking at the pace of this expansion there are reasons to be less cheerful. This expansion may be long and stable from a historical perspective (the average post WWII expansion lasted 58 months according to NBER institute, which dates business cycles), but it is by far the slowest. Since the end of the Great Recession, US real GDP grew a cumulative 24%, while the 1991-2001 expansion generated a cumulative growth of 41%, implying real GDP growth has run 1.7% below the Clinton-era boom on an annual basis.
The reason for this subdued growth path is the US consumer. The graph of the week shows US consumption expenditure paths (corrected for inflation) during NBER expansion phases post WWII. These paths reflect to some degree the overall subdued GDP growth, with US consumption lagging US consumption during the 1991-2001 boom by 2.1%.
Of course this begs the question, why has US consumption growth been so timid with respect to history in the past ten years? Isn’t US consumer confidence supposed to be at levels even higher than the peak levels observed during previous expansions (expect the 1991-2001)? Confident consumers should be more willing to spend.
Part of the answer resides in US household balance sheets. The Great Financial Crisis damaged US household balance sheets severely. US household debt outstanding as a percentage of net household disposable income peaked in 08Q1 at 133.6% and has consistently fallen to just 98.1% in 19Q1. The wake of the Great Financial Crisis has brought about a great deleveraging among US households, which has hampered consumption growth as people used income to pay off their debt instead.
However, this is not the complete story as the above line of reasoning applies only to the first years of the expansion. US net household debt bottomed in 12Q2 and from that point on has been steadily rising again. Why has this not triggered a boom in consumption growth? As the NY Fed recently noted, debt growth since the GFC has been concentrated among older, higher credit score and presumably wealthier households. These are also typical households with a lower marginal propensity to spend their available cash.
Lastly, consumption growth could have been restrained by higher risk aversion as the memory of the crisis remained alive, and gloom is extrapolated into the future. Literature shows that if income drops threaten habitual spending patterns, households become very risk averse and attach more value to every additional dollar of income. This risk aversion explanation corroborates with the doubling of the US household saving rate since 2007. Thus, the appearance of a ‘steady she goes expansion’ reveals significant changes in consumption behavior.
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