Stephen Roach: "The American Consumer Is Not Okay"

Tyler Durden's picture

Authored by Stephen Roach, originally posted at Project Syndicate,

The spin-doctors are hard at work talking up America’s subpar economic recovery. All eyes are on households. Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back.

Don’t believe it. First, consider the facts: Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%. That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.

With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment.

To appreciate fully the unique character of this consumer-demand shortfall, trends over the past 21 quarters need to be broken down into two distinct sub-periods. First, there was a 2.2% annualized decline from the first quarter of 2008 through the second quarter of 2009. This was crisis-driven carnage, highlighted by a 4.5% annualized collapse in the final two quarters of 2008.

Second, this six-quarter plunge was followed, from mid-2009 through early 2013, by 15 quarters of annualized consumption growth averaging just 2% – an upturn that pales in comparison with what would have been expected based on past consumer-spending cycles.

That key point appears all but lost on the consumer-recovery crowd. In recent speeches and discussions with current and former central bankers, I have been criticized for focusing too much on the 0.9% trend of the past 21 quarters and paying too little attention to the 2% recovery phase of the post-crisis period. At least it’s a recovery, they claim, and a sign of healing that can be attributed mainly to the heroic, unconventional efforts of the US Federal Reserve.

This brings us to the second part of the argument against optimism: analytics. One of the first concepts to which an economics student is exposed in a basic macro course is “pent-up” consumer demand. Discretionary consumption is typically deferred during recessions, especially for long-lasting durable goods such as motor vehicles, furniture, and appliances. Once the recession ends and recovery begins, a “stock-adjustment” response takes hold, as households compensate for foregone replacement and update their aging durable goods.

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. In the eight recoveries since the early 1950’s (excluding the brief pop following the credit-controls-induced slump in the 1980’s), the stock-adjustment response lifted real consumption growth by 6.1%, on average, for five quarters following business-cycle downturns; spurts of 7-8% growth were not uncommon for a quarter or two.

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. Moreover, the strongest quarterly gain was a 4.1% increase in the fourth quarter of 2010.

This is a stunning result. The worst consumer recession in modern history, featuring a record collapse in durable-goods expenditures in 2008-2009, should have triggered an outsize surge of pent-up demand. Yet it did anything but that. Instead, the release of pent-up consumer demand was literally half that of previous business cycles.

The third point is more diagnostic: The shockingly anemic pattern of post-crisis US consumer demand has resulted from a deep Japan-like balance-sheet recession. With the benefit of hindsight, we now know that the 12-year pre-crisis US consumer-spending binge was built on a precarious foundation of asset and credit bubbles. When those bubbles burst, consumers were left with a massive overhang of excess debt and subpar saving.

The post-bubble aversion to spending, and the related focus on balance-sheet repair, reflects what Nomura Research Institute economist Richard Koo has called a powerful “debt rejection” syndrome. While Koo applied this framework to Japanese firms in Japan’s first lost decade of the 1990’s, it rings true for America’s crisis-battered consumers, who are still struggling with the lingering pressures of excessive debt loads, underwater mortgages, and woefully inadequate personal saving.

Through its unconventional monetary easing, the Fed is attempting to create a shortcut around the imperative of household sector balance-sheet repair. This is where the wealth effects of now-rebounding housing prices and a surging stock market come into play. But are these newfound wealth effects really all that they are made out to be?

Yes, the stock market is now at an all-time high – but only in current dollars. In real terms, the S&P 500 is still 20% below its January 2000 peak. Similarly, while the Case-Shiller index of US home prices is now up 10.2% over the year ending March 2013, it remains 28% below its 2006 peak. Wealth creation matters, but not until it recoups the wealth destruction that preceded it. Sadly, most American households are still far from recovery on the asset side of their balance sheets.

Moreover, though the US unemployment rate has fallen, this largely reflects an alarming decline in labor-force participation, with more than 6.5 million Americans since 2006 having given up looking for work. At the same time, 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.

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22winmag's picture

House of cards... propped up with duct tape and bailing wire, soon to come tumbling down.

El Oregonian's picture

Yep, and the markets for the civilians is a total joke. Though the Sheeple seem to always come B-A-A-A-H-H-K... When will they learn that it's all fixed... Not fixed in a good way, but fixed in a bad way.

Beam Me Up Scotty's picture

"the healing has only just begun"

Where exactly is the "healing" you are talking about?  You could call giving a terminal cancer patient chemo therapy healing I suppose.  Maybe he lives 6 months longer.  Not sure that would qualify as healing though.

James_Cole's picture

That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.

So... Americans are buying less over-priced crap from shitty companies on credit from TBTF, Roach is saying this like it's a bad thing. 

Kaiser Sousa's picture

"Where exactly is the "healing" you are talking about?"

yeah, he should have left that shit out...aint no mother fucking healing goin on...everywhere i turn people r broke ass hell and aint getting no work...and im talking about contractors, mortgage brokers, Title Company workers and the lot that thought good times were here to stay back in 07'.....


toys for tits's picture

Healing my ass.

Apparently, even he's sucseptible to the media barrage of phony good news.  So while not drinking the koolaid, he did take a sip.

kaiserhoff's picture

By healing, he must mean that Obummercare has not yet slaughtered the last of the small businesses. 


El Viejo's picture

I hear a new Internet Tax is in the works. Just like the Self Employment Tax of Reagan politicians can't wait to kill off the cradle of new business with a tax. Soon we will see a Fetus Tax payable shortly after birth.



jbvtme's picture

with the onset of robots, digital printers (worker widow makers) and drones...this nightmare is just getting started. an economy built on consumption was bound to fail.  i'm long undertakers.

kridkrid's picture

Within the context of a credit/debt based monetary system, it is, in fact, a bad thing... unless, of course, you are rooting for total collapse, which is a valid POV. I'm willing to bet, however, that only 1 out of 10 who talk of "bring on the collapse" are actually prepared for said collapse. The one who is prepared can't possible plan for every scenario. And so I'm clear... collapse in inevitable... kicking the can is just kicking the can. There is no solution, only timing.

Jugdish's picture

Just because one hopes for a total collapse doesn't necessarily imply one intends to survive it. This system must die. It is dying....slowly. 

James_Cole's picture

Collapse of what is my quesiton. It makes me think of a plantation or something, the slave owner is experiencing the effects of a downturn in the economy and the slaves are terrified that if the owner stops getting work they'll all be out a "job" instead of thinking "hey what can we do about this whole slavery thing?" 

Do Americans actually think that the current class hierarchy of the US is a good thing? That on balance the US is a force for good in the world? That a system with heavy corruption on every level should be sacrificed for? 

All over the place, from the popular culture to the propaganda system, there is constant pressure to make people feel that they are helpless, that the only role they can have is to ratify decisions and to consume.

kridkrid's picture

I agree with everything you say.  I don't think that on balance the US is a force for good in the world; quite the opposite, really.  I don't think that current class hierarchy is a good thing, and I think the plantation metaphor is fair.  To your point "from popular culture to the propaganda system..."... I actually don't differentiate between the two. 

All that said, however, I'm not terribly optimistic about life during the coming transition, nor am I terribly optimistic about what things will look like on the other side.  We shall see.

James_Cole's picture

A lot of the coming 'transition' has already happened, the elite are sounding the alarm bell because they're terrified of what they see. 

The institutions of corporatism have failed and are currently being propped up synthetically (and due for another well-deserved collapse) but a world without those institutions would be a better place. 

That doesn't mean they'll go down easy, they'll inflict as much pain on as many as possible - whether through fascism, poverty etc. but that's always been the case anyway, they're just good at hiding their transgressions. 

We have two American flags always: one for the rich and one for the poor. When the rich fly it means that things are under control; when the poor fly it means danger, revolution, anarchy.

Skateboarder's picture

A lifetime of continual false dichotomy on all fronts.

Totentänzerlied's picture

But not because they've seen the errors of their ways, only because they've maxed out the last charge card.

dracos_ghost's picture

Steven Roach is a literal roach. Let's not forget it's this "thought leader" that promoted BRIC(primarily China) at all cost which destroyed the US consumer and the US economy.(Hey Stevie, no jobbie that went offshore, no money to buy things). This attempt at self-absolution by historical deflection is nauseating. It has been his economic policy recommendations and the rest of his fellow economist  warlocks that screwed the pooch.

This guy is on par with Krugman as a despicable human being in my book. Another pompous Ivy League d-Bag who thinks he's above everyone. If history had any integrity, this guy would be listed in the top 10 for the destruction of the world economy.

jerry_theking_lawler's picture

in real 'life'...that terminal patient could make it longer than you or I is up to God to decide our path....


i know one thing is certain, you will not make it out of 'this' alive.


so the moral....don't sweat the little stuff....and remember, everything is little.

Kayman's picture

Duct tape and bailing wire now made in China.

apberusdisvet's picture

See-through retail strips were rife in 2008.

Guess what?






Dareconomics's picture

It's all about income growth.  The US economy is dominated by consumer spending, and the majority of consumers are experiencing stagnant or falling incomes.

Beam Me Up Scotty's picture

And its about stealth inflation.  They don't want to report the REAL inflation rate.  If your income grows by 3% but inflation is 8% you are still going backward.

Stealth inflation is everywhere too.  From government data that doesn't tell the whole picture, to smaller container sizes, to things that only last half as long, inflation is MUCH worse than we are told.  2% my ass!!

yogibear's picture

The shrinking package size has become very noticeable.

akak's picture

You know they have Viagra for that now.

Kayman's picture

"things that only last half as long,"

Minor correction: Things that last half as long, but cost twice as much. Our New Normal.

Seeking Aphids's picture is all about income growth or the lack thereof.....and this article fails to point out that the loss in income growth has been going on for decades, not just post 2008.....we have not seen real income growth since the 1970's in NA. This has been covered over and made up for to some extent by the huge increase of credit and by the addition of a second salary (the wife) to many households. That has not been enough, however, to make up the shortfall and we are increasingly living on credit just to get by....there can be no true economic growth without income growth and it is still going the wrong way....until this changes we are just shifting the seats on the deck of the titanic......QE will just end in a huge hangover for those who binged on it and a huge debt for the rest of us......get ready for a lower $$ and higher inflation. NA's will have to adapt to lower and lower standards of living until the rest of the world catches up....then we can hope to see salaries go up (to catch up with the Chinese). Sad, sad, sad.................buying gold stocks may be one way for those with investment $$'s to protect their savings heart goes out to the poor fucking NA peasants (myself included) screwed over by the 1% who could have averted this situation by paying taxes on some of their outrageous wealth instead of socking it away in tax havens (don't tell me taxing the uberwealthy and multi-nationals is a bad thing....if you think that and are not part of the 1% you have been brainwashed).

Beam Me Up Scotty's picture

Its not even the 1%.  Married people making $250k are supposedly in the 1%.  They aren't living like Warren Buffet or Bill Gates.  Its more like the .1 % that have the most wealth.

Seeking Aphids's picture

Ok.... point 1% if you prefer....we all know who we are talking about here.......the distribution of wealth is increasingly and astoundingly being concentrated into the hands of a very few incredibly wealthy people and businesses who pay virtually no tax while the rest of us flounder in a sea of taxes, fees and 'charges'...............the US was created as a result of people's outrage at taxatation without representation........we are now ruled by a few who pay no tax and who represent no one but themselves....where is the outrage?? Oh, I forgot, the Tea Party co-opted it and then left the manipulation by the .1%!

kridkrid's picture

I don't now if the "Tea Party" co-opted it, or if the Tea Party was co-opted by the Republican wing of the one party finance fascism, MIC party.  And it doesn't really matter, because it has, in fact, been co-opted.  I feel the same way about OWS.  I think both movements had a moment of sincerity, but were essentially captured.  Ironically, the core tenants of both movements are they same, even if those involved don't understand it.  We can't have anything nice.

Miffed Microbiologist's picture

This is so true Scotty. My husband and I make between 225k and 250k depending if he gets a bonus. Twenty years ago we made a combined income of 100k. So we have had a dramatic increase in income. However there is a DRAMATIC difference in our life style. Twenty years ago we could comfortably pay our bills and lived a good life, albeit frugal. Today every month is a nail biting challenge to stay in budget. We cannot save adequately to anticipate unexpected expenses ( struts went out on my car last month and we had to use the heloc to cover the $2000...that would have been anathema 10 years ago) Every luxury we used to take for granted we've cut out. Taxes and inflation have sucked the life out of us. If you had told me at 16 I was going to make this kind of money I would have assumed I would be living the life of Riley. Not that I don't appreciate my job and life because I am execedingly grateful for what I have. But, frankly , earning this income is quite meaningless when it's all taken away.


cynicalskeptic's picture

The buyong power of that $200,000 is a lot less than that $100,000 was 20 year sback - but the accompanying costs - especially TAXES (income and property, sales and everythign else) keep going up - while you're making NOTHING on your savings and investmernts (IF you have any).

High salaries usually go with high priced areas BUT if you live in a high priced place you're screwed.  The median household income around here (NYC burbs) is $200,000 but the cost of living is brutal.  Local property taxes have more than tripled in the last 20 years and the cost opf pretty much anything has gone trhough the roof.  Heating oil has gone from under $1 a gallon to over  $4.   Food is nuts - a pound of bacon went from Around $4 to over $7 in the last year.....  BACON.   A rib roast is obscenely expensive.

But $200,000 puts you in the 'top 1 or 2%' nationwide.  Doesn't feel like it.  My brother in NC has a far better lifestyle on a lot less income.

debtandtaxes's picture

I can only confirm what you say. It sounds crazy! But I am in Toronto where housing, property tax, income tax, life/auto/health insurance and food prices are just killing us. Thankfully we haven't been sucked into "buying up" into a 500k mortgage like many of my friends and colleagues. We live modestly - still haven't renovated our kitchen - but manage to afford decent quality furniture, clothes and foods for our kids. And save a bit, too. But unlike my friends, I will own my house in 10 yrs!



Stuck on Zero's picture

The huge number of government employees and retirees in this area are flush.  New homes, remodels, new BMWs, Lexus, and Mercedes, are everywhere.  Government people are doing really well right now.


shuckster's picture

I've lived inside the DC Metro area for most of my life, and never before have I seen so many (previously any) Maserati's, Ferrari's, etc etc. Here in Northern Virginia, the excess is palatable. A ten minute drive through Middleburg, Chantilly, Roundhill, you will see 100 $1,000,000 + houses and probably just as many $10,000,000 houses. Its trickle down, but it only trickles down from the $35+ million tax brack to the $18 million tax bracket. Lobbyists, lawyers. Rich Afr Americans in 7 series' everywhere. They are all gov't employees or work with the government and they are living LARGE. Its not the economy, its the government, STUPID!

Whiner's picture

Visited several horse spreads in Middleburg and about. Many of the first generation owners had mysterious consulting jobs with agencies. It was hard to understand what real value they were delivering to Uncle. As Ike said to the peeps upon turning over the keys to the White House,"Beware of the [bankers and] the military-industrial complex." The bracketed part was excised by his pol adviser. He could see the real fiat flows and the coming of The Oligarchs. People dont listen, don't want to hear. Rather be happy than free. Sweep on you fat and greasy citizens. The days of your harvesting will turn to slaughter. VTY, A. Hitler, J. Stalin, Mao and Pol Pot.

shuckster's picture

They say Potomac is for millionaires, Middleburg is for billionaires. How did anyone become a billionaire on $400,000 a year, which is roughly the highest paying government salary?

jerry_theking_lawler's picture

yeah, and people actually 'donate' almost 1,000,000,0000 dollars to get a man elected to a 400,000 per year job. yep, there is no political favors here to see. move along.

shuckster's picture

Now that we've reached the guilty verdict, what would you suggest the sentence be?

dolph9's picture

My boss is a black lady who grew up poor in the south and now drives a Mercedes and is a disabled parking cheat.  She is promoted up the ranks by the federal government.  I shit you not.

Ain't America grand.

Mrmojorisin515's picture

it was bound to collaspe as soon as they started fudging the numbers in the 80's.  They learned their lesson during that period, people get angry when they know the truth.  Also you can add higher education and healthcare to your list of government employees.  Sometimes i'll watch a video of some financial type, and they'll be talking about how QE is bad and then suggest investing in healthcare, and that industry won't go down and is only going to grow.  I suppose i fail to understand how anything is going to grow when everyone broke...... i must be missing something.  Anyways, lots of healthcare people are going to be unemployed when this shit pops

Son of Loki's picture

House prices are beginning to "correct" ...revert to the mean as mortgage rates rise. The buyers who were sucked into the spin that the house market has stabilized now get to watch thier houses sink in value. In my neighborhood nothing is selling...very quiet for the so-called "peak RE time of year."



shuckster's picture

Houses are going back to their 1995 prices, which is where they were before FHA (via Clinton) started giving mortgages out to those who neither had any intent to pay them nor were capable if they wanted to. When those borrowers defaulted, the government made the banks whole by printing money away from good citizens

*I mean Fair Housing Act, not Federal Housing Administration. These abominations are a cancer on the market and no I do mean to offend

Goldilocks's picture

Cornershop-Brimful-Of-Asha (4:01)

Brimful Of Asha-Cornershop (ORIGINAL VERSION) (5:15)

Cornershop - Brimful Of Asha, Norman Cook Mix (Tjinder Singh) Official Music Video (3:57)

Cornershop - Brimful Of Asha (Live Jools Holland 1997) (4:36)

tenpanhandle's picture

I did, thanks.  Hope the arrows pierce the armor.

repete's picture

Here's the Plan.

Continue to harvest the wealth of of the middle class while paying off the welfare class.  

When done with that default on everyone.

Brutally repress the violent social reaction and lower the population with advanced weaponry.

Live happily ever after.

Totentänzerlied's picture

The wealth of the middle class is their labor, their small amount of property, and their essential role as the semi-permeable barrier between the lower and upper classes.

shuckster's picture

Anyone who didn't have their thumb up their ass and a dick in their ears saw this coming 500 miles away. Default is such a legal term. .gov defaulted when it took out JKF which was our Julius Caeser moment. Anyways, there is and never has been a need to say "I will no longer be paying the debt" 

It said that the day it started printing money. Ask Lenin about debauching a currency

gjp's picture

Healing hasn't even started.  The 99% are stringing along by accessing government benefits or not paying their mortgage.  Labour's share of GDP is still steadily decreasing and inflation in 'non-core' necessities like food and energy is squeezing budget's relentlessly.  Where does Roach see healing beginning exactly?