If all it took to revive an economy was rhetoric from officials, America would be in fine fettle. This week Barack Obama and Ben Bernanke both weighed in, with the former highlighting “glimmers of hope” and the latter seeing signs of a “levelling out” in the economy – the first step towards recovery.
Yes, but what’s really happening is “the data are no longer collapsing at a 50%- 70% annual rate”, said David Rosenberg of Merrill Lynch. But the trend is still down and we’re hardly close to “recovery mode”. Enter this week’s March retail figures, which showed a slide of 1.1% after an uptick in January and February. Sales slid in all areas of discretionary spending, said Capital Economics and are now 10% down on June’s peak.
American economy: what next?
The economy could continue to decline at a slower pace for some time, said Krishna Guha in the FT. Consumption is the main driver of growth, comprising 70% of GDP. Households with massive debts, now worth 130% of their disposable income, and historically low savings, have finally started retrenching. Meanwhile, unemployment continues to rocket by half a million jobs a month, earnings growth is weakening and the housing collapse has already wiped a fifth off their net wealth.
Indeed, according to McKinsey, the fall in household wealth so far will take about $650bn of spending out of the economy (that’s most of the fiscal stimulus), said Lex in the FT.
Deleveraging is an even bigger drag: a 5% drop in the debt-to-income ratio implies $500bn less consumption. “A big engine of growth” has been removed, as Stephanie Giroux of TD Ameritrade put it. It’s likely to be years before it is firing on all cylinders again – implying a prolonged downturn and a tepid recovery.