Uh-Oh: We Already Started Spending Like It’s 2005

  • Share
  • Read Later
Getty Images

The two-faced recovery soldiers on. One day, indicators like the Case-Shiller housing index give us hope that the economic recovery is finally gaining steam, and the next day the ISM Manufacturing Index shows the sector actually contracted in May.

Amid the confusion, however, some commentators see a fate much worse than a tepid recovery. News organizations from Bloomberg to Yahoo have been wondering whether the recent gains in the housing market are setting the stage for another real estate bubble. The reasons for this concern: home values are increasing far faster than wages, while retail sales and GDP growth seem to be accelerating faster than the fundamentals would allow. And if retail spending, home prices and economic activity are growing faster than worker paychecks, it means we’re taking on more debt — and at some point that will become an unsustainable situation.

It’s the same unsustainable situation, in fact, that characterized the run-up to the housing crisis. In the early 1990s, the average American’s debt load was 83% of his income, but by 2007 that number reached a staggering 130%. Americans compensated for stagnant wage growth by “using their homes as ATMs,” as the catch phrase has it, taking out more and more mortgage-backed debt with the belief that home prices would always continue to rise. And a reckless banking system was only too happy to oblige.

The Great Recession was supposed to have changed all that. In the wake of the financial crisis we read story after story of chastened Americans socking away more money in their retirement accounts, paying down debt and saving for their children’s educations. The national savings rate, which had averaged just 2.84% between 2000 and 2007, climbed above 6% in 2008.

But it would seem that this postrecession parsimony has ended. One of the main reasons why tax increases and sequestration-related spending cuts haven’t slowed consumer spending or GDP growth is that Americans have given up on the whole savings thing once again. According to William Emmons, an economist at the St. Louis Federal Reserve, “the rise in consumer spending is somewhat worrying because it’s a product of the savings rate falling back to 2.5%.”

In other words, much of the good news we’ve seen out of the economy in recent months has been because of Americans saving less, and that’s simply not something we can sustain indefinitely.

So what can really get the economy going in a sustainable way? Emmons says helping lower-middle-class and poor Americans get out from under heavy debt loads would be a start. The federal government has consistently failed to help those hardest hit by the housing crises to restructure their debts. Rising student-loan debt is also hampering these segments of the American economy. When many of the consumers that are supposed to be powering the economy are drowning in debt that can’t be restructured or discharged, it’s as if one of the engines of the economy has failed.

Another way for the U.S. economy to grow sustainably would be for U.S. businesses to invest more at home and export more. In fact, there’s reason to be cautiously optimistic on this front: businesses are borrowing again, with commercial and industrial loans growing at a double-digit pace. Many businesses have been borrowing to increase dividends and pay down debt, not to invest or hire workers. But Mark Zandi, chief economist for Moody’s Analytics, argues that this process can only go on for so long. Says Zandi: “I’m hopeful that this will start translating in bigger and better investment numbers and job numbers in the near future.”

Ultimately, it’s these jobs, along with higher wages, that will be the real fuel for economic growth.

18 comments
MickeyCashen
MickeyCashen

There's no incentive to save -excepting in reserved retirement vehicles- except for the self-discipline of people who make sure they live beneath their means.  The government should reward regular saving but instead it actually rewards spending, then stands by as its special interest masters make sure the citizens are tempted to spend more than save.  If you put money in the bank it will buy fewer things in a year than it will buy now - and, since Nixon, you pay tax on that bank interest, if you collect enough, even though it doesn't keep up with inflation.  Your credit rating falls if you don't use your credit card and falls if you don't keep a lot of cards or loans going.

GreenFields
GreenFields

Americans' savings rate has seriously gone up, over the past five years and major de-leveraging has taken place. The difference is confidence; Americans are feeling confident enough to now spend a higher portion of their pay and sometimes, save less. All the indicators have confirmed this. For your idea to be correct, Mr. Matthews, it would mean more people are now borrowing against equity on their mortgages, like they were in 2005, which is not happening. Fewer people are even qualifying for such loans.

Face it: The American Economy is getting better and it's happening in the healthiest way. It's okay to acknowledge that Americans are actually doing the right thing and being more responsible. After lower consumption for half a decade, Americans are ready to spend, again.


Christopher_Matthews
Christopher_Matthews moderator

@GreenFields Deleveraging has certainly taken place. But the data clearly show that the savings rate has now fallen back to pre-crisis levels.

MarkHolland
MarkHolland

Debt is a drug whose use increases in hard times. What better way to escape the brutal reality of poverty than to spend money you don't have? Too many Americans are living without hope. They have given up. The challenge is to change this. It won't be easy.

advocatusdiaboli13
advocatusdiaboli13

@MarkHolland Our government sets a bad example. Bush funded wars on debt rather than raise taxes or not go to war. But it corsses party lines. Now under Obama our government spends more than it earns as well and Obama is the big socialist showering the Takers with OPM (Other People's Money). As Maggie Thatcher said:"The problem with the Socialists is that sooner or later they run out of other people's money". So why is Obama so popular? A George Bernard Shaw put it:"A government that robs Peter to pay Paul can always count on the support of Paul".

MarkHolland
MarkHolland

@advocatusdiaboli13 @MarkHolland I half agree. You're right on the war and taxes. But I don't see Obama rushing to rob peter OR pay Paul. He is as pro-Wall Street as any President in history, more than Dubya. He is a Trojan hose (not a typo).

BobJan
BobJan like.author.displayName like.author.displayName like.author.displayName 3 Like

@MarkHolland It's be easier if they'd raise the starting wage for most jobs above 8 or 9 an hour for a grown man or woman with a family. Those are non liveable wages and "we the taxpayer" end up subsidizing the wealthy by giving food stamps, rent help, school lunches etc because of the low wages paid. Time to end this nonsense. Want to live in America, want to be protected , want to live free, well there's a cost and we "all" have to pay up. Want to stick your money in other countries, well go live there. There's enough for everyone's needs but not enough for everyone's "greed".

xoned220
xoned220

Gawd this is frustrating, the conservatives main argument is that they created a huge problem from 2000 to 2006 and those low life liberals wont fix it.

Stop
Stop

I'm not getting into debt, so banks make money. I'd rather keep my money and eventually flee the country.

andrewtimesthree
andrewtimesthree

This recovery is not sustainable because we are not saving and investing. We are over-consuming and financially speculating. And we are doing that because government fiscal policy aims to transfer wealth from the rich to the poor and encourage the poor to spend it. Fed policy aims to depress interest rates to boost demand. Thus we get excessive financial liquidity, which leads to overconsumption and financial speculation, as it did in the late '90s and the mid-2000s.


The arguement for these policies is we must boost demand to avoid depression and jump-start the economy. But while economic downturns are painful, allowing markets to correct themselves naturally channels investment into more productive sectors so that when recovery does start, it is on a firm foundation and is thus strong and sustainable. It is possible for the government to help the truly needy without excessively attempting to micromanage the economy.

GreenFields
GreenFields

@andrewtimesthree The highest savings rate we've had in decades, was accomplished over the past, three years. After 2008, a couple of years of major de-leveraging happened and then Americans did something novel; we saved. Many had lost income but when we took up new jobs or dealt with re-structured positions, we saved -- even if possibly out of fear of losing our jobs. Because Middle Class Americans lost a great deal of wealth in 2008, it's taken this long to get back to consumption. 

Something changed in us. This article doesn't recognize that consumption is only just picking up, after years of weak growth. It wasn't like we were "consuming like it's 2005" in 2008 and 2009.

bookwerm
bookwerm

Please do better research! The "fact" that folks "paid down" debt is often repeated, but actual data does not support that! The MASSIVE reduction in consumer debt is due to WRITE OFFS, not pay down.

Christopher_Matthews
Christopher_Matthews moderator

@bookwerm  The only statistic I pointed to was that the savings rate increased after the crisis, which it did. You are correct that much of the reduction in consumer debt came from mortgage defaults, but that doesn't mean that there aren't people out there who have used the low interest rate environment we're in now to pay down debt more aggressively.

llbigwave
llbigwave

@Christopher_Matthews @bookwerm You both have points.  Some households have really tightened their belts and paid down debts; others have defaulted.  I know of examples of both in my small workplace (staff ~20).  However, I don't know how to quantify the ratio of paydown:default.  Any ideas?

GreenFields
GreenFields

@bookwerm Collateral being confiscated is not a "write off". When banks took homes, part if not all of the terms of these agreements were met.

antonmarq
antonmarq

At least in 2005, we knew we had two wars going on, and jobs we starting to downsize. Today, we have absolutely no jobs to count on, services, like Times Inc. supporting the GOPs' effort to create a slave society, by keeping people in the dark ages, adding automation to American manufacturing, outsources jobs, having the greedy rich hoard their cash or hide it in other countries to avoid paying taxes, the list are as endless as the times. However, there's a shining light at the end of the rainbow, once the Dems get control of Congress, all this will change, and as for the rich, let them all go to wherever they think they'll be safe.

BobJan
BobJan like.author.displayName like.author.displayName 2 Like

@antonmarq all sounds good, but. the dem's are the same as the repub's. they're all rich and they serve none other than their monied donors. they could care less about the voters. they put on a good show but that's all it is.