The American Consumer Is Not Back in the Game

Optimistic reports of the recovering American economy, 70 percent of which relies on domestic consumption, overestimate the extent to which consumer spending is on the rebound.

What's the Latest Development?


Optimistic reports of the recovering American economy, 70 percent of which relies on domestic consumption, overestimate the extent to which consumer spending is on the rebound, according to Yale economist Stephen Roach. "Over most of the postwar period, this post-recession release of pent-up consumer demand has been a powerful source of support for economic recovery [lifting consumption growth by an average of 6.1 percent following business-cycle downturns]. ... By contrast, the release of pent-up demand in the current cycle amounted to just 3% annualized growth in the five quarters from early 2010 to early 2011."

What's the Big Idea?

What optimists choose to ignore, says Roach, is the enormity of the consumption bubble that spurred the growth of the late '90s and early '00s. This growth was built on excessive debt loads, underwater mortgages, and woefully inadequate personal savings. When that growth proved hollow, America's consumers found themselves more poorly prepared to recover from recession that preceding generations. "While consumer confidence is on the mend, it remains well below pre-crisis readings. In short, the American consumer’s nightmare is far from over. Spin and frothy markets aside, the healing has only just begun."

Photo credit: Shutterstock.com

Read it at Project Syndicate

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