How much less will we spend?
Some economists, like David Rosenberg, think the answer is substantially less—and for years to come. For quite a while now, Rosenberg has been writing about how the American consumer is due for a serious deleveraging, which means less spending, and how this is the real conversation we should be having. Forget about trolling the stock market and production data for green shoots. I've recently followed his lead and written this story.
In it I talk a lot about how much debt we have, as measured by the household debt-to-income ratio:
One way to understand the Great Consumer Retrenchment is to look at the amount of debt the typical household carries as a percentage of its disposable income. The ratio of debt to income increased from about 35% in the early 1950s to about 65% by the mid-1960s, where it more or less stayed until the late 1980s. That's when debt started its epic rise, hitting 100% of income in 2001 and going all the way up to 133% in 2007. That figure is now starting to fall. At the end of 2008, the debt-to-income ratio was down to 130%.
The Federal Reserve released new data (PDF) on household debt today. David Lang at the San Francisco Fed was nice enough to crunch the numbers for me: we're now looking at a debt-to-income ratio of 127.5%. That's a pretty startling fall to take place in just three months. Though we probably have quite a ways to go yet. Rosenberg, for one, thinks that to get back to a sustainable level, households have got another $3 to $5 trillion in debt to pay down—or default on. More on that here.
Barbara!
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1
And (like you said in the article) it does raise a question - what is the new normal?
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Go back two years and you could find any number of economists who would argue that the growing leverage in real estate and private balance sheets was sustainable - it, spectacularly, was not.
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Now we're left in a grey area. Lower cost-of-debt, and more complex debt-issuance, means we should be able to sustain more borrowing, but there doesn't seem to be much consensus on what that level is. 100%? 60, 70, or 90%?
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Lacking a clear idea of the magnitude of consumer spending contraction means there's just more uncertainty in the market. Uncertainty in inventories, in business planning, or the length of the recession in general. I wonder when we'll start to see some consensus on that. -
2
What are the implications for those of us who already have low debt-to-income ratio? Will our demand curve stay the same as aggregate demand falls, leading to a bonanza of low price goods? I hope so!
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3
Had a conversation with someone the other day ... Looking at the consumer spending data, 1st quarter of 2009 is negligibly above the 1st quarter of 2007 in real dollars. So that's basically 2 years of standing completely still, on aggregate, while population has increased by an estimated 1% per year. Keep up a weak pace for another year or two to get debt-income relations more sane and you'll find a markedly lower level of consumer spending vs. the prior trend.
But will there be a new (slower?) trend as well? We probably want to do a good balance sheet analysis, which our economists have never been particularly keen on (it's fairly limiting to have to account for everything). And if the consumer trend slows, then the investment trend practically has to slow (unless we start making things to sell to the rest of the world - ha!). Fun, no?
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