Dead Men Left

Tuesday, August 16, 2005

More doom-mongering

Slightly by way of a public service announcement, here's Morgan Stanley's chief economist bewaring the ides of March (2006):

The reason to worry, in my view, is that the cost of [the US economy's] cyclical resilience in the face of an energy shock is not without serious consequences for an unbalanced world. In particular, it has pushed the asset-dependent American consumer to a new state of excess. At first blush, there seems to be little reason to worry -- according to our US team, personal consumption growth is tracking a 5.5% gain in the current quarter. But consider the costs of that stellar accomplishment -- a personal saving rate that has finally hit the “zero” threshold, debt ratios that continue to move into the stratosphere, and asset-led underpinnings of residential property markets that are now firmly in bubble territory. Courtesy of surging oil prices, these costs are now at the breaking point, in my view.

...there can be no mistaking the precarious position of today’s US consumer. In the face of an unprecedented shortfall of labor income -- with real compensation growth in the 44 months of the current expansion running $282 billion below the path of the typical cycle -- consumers have not even flinched. Reflecting a new asset-dependent spending mindset -- first arising out of the equity bubble of the late 1990s and more recently supported by the property bubble -- US households have been more than willing to draw their income-based saving rates down into unprecedented territory.

While this penchant for spending may make sense in normal periods, it is the height of recklessness in the face of an energy shock. In the two oil shocks of the 1970s, the personal saving rate averaged about 9.5%, whereas in the oil shock just prior to the Gulf War of early 1991, it was around 7%. That means that in each of those earlier instances, US consumers had a cushion of saving they could draw upon in order to maintain existing lifestyles. Today’s “zero” saving rate underscores the total absence of any such cushion. The only backstop available to support the spending excesses of American consumers is the saving that is now embedded in their over-valued homes. Yet with the housing bubble now in the danger zone, that’s not exactly a comfort zone.

The UK's not in quite the same position, the housing bubble (thus far) deflating rather slowly, but the same low-savings, high-credit consumption has been fuelling growth for most of the current decade - proppped up, more recently, by high government spending. Despite a lower oil-dependency than the US (compensated for partial by higher natural gas-dependency), the situation here is precariously similar. If consumer spending slides, for whatever reason, the rest of the economy goes with it.