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.