Friday, March 28, 2008

 

It's So Over for Household Spending

From my favorite economist, Paul Kasriel, a graph heavy tract on why consumer spending is likely to slow significantly. To summarize, Americans have been reallying on mortgage equity withdrawals and, more recently, sales of equities to fund spending which has outstripped income for about 8 years. Households cannot run deficits forever without risking bankruptcy. Once the savings runs out the spending stops and this is especially bad news for the economy.

The upshot of all this is that in the next several years, the U.S. is likely to experience not only sluggish growth in homebuilding, but also very sluggish growth in the demand for home furnishings and other consumer discretionary goods and services. It very well could be that instead of U.S. corporations being the biggest buyers of U.S. corporate equities, U.S. households could become the biggest buyers. Similarly, instead of foreign central banks continuing to be big buyers of U.S. Treasury debt, U.S. households could take their place - i.e., after the yield on Treasury securities rises above the U.S. consumer inflation rate.


The U.S. economy is due for a fundamental shift simply because the world is starting to consume more and to need the capital which we have used. It is our turn to save and finance the rest of the world. This will be a difficult transition to put it mildly.

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