Monday, September 14, 2009

Real consumption spending to rise from the dead, briefly

Tim Duy offers some dyspeptic comments on confidence and consumption similar to my own a few days ago.  However, he (and the rest of mainstream economics) continue to ignore research (however obscure) indicating the adaptation level theoretic foundations of confidence determination (reference).  Duy’s nice graph of year-over-year real consumption spending against the University of Michigan sentiment series inspired a similar effort with the “animal spirits” indicator that shows that real consumption spending is about to enter a growth phase.  The contemporaneous correlation of YOY real C and “animal spirits” is about 0.63; the regression with constant has an adjusted R^2 of about 0.33.  But the “animal spirits” indicator has proven extremely sensitive to turning points and trends, more so than the Michigan series.

This is consistent with my general view that the U.S. economy is entering a relatively brief “anti-deflationary” reflationary bubble that will resemble an ordinary business cycle except for the elephant in the room, namely, a growing national debt-to-GDP ratio coming on top of record levels of the ratio.  If I had to bet on whether private sector deleveraging will outrun public sector leveraging, I would bet not.  Not enough private debt is being written off.  The U.S. has more debt than it can service now (see Comstock’s piece).  In 1933 we were the world’s greatest creditor and could borrow easily.  Today our currency is at risk of substantial depreciation.  Our social contract is broken, with extreme inequality in incomes and wealth and a general self-defeating distrust of government by the disenfranchised.  Our deflationary collapse has only stalled.  The tragedy is that the rising “animal spirits” of the next several years will probably guarantee that no meaningful reform takes place—of the financial sector, of the government’s priorities and budget, perhaps even of health care.  In this environment both fiscal stimulus and quantitative easing are fool’s games.  The government should provide health care and livable workfare to the unemployed and limit any increase in spending.  America is a basket case but the government won’t admit it. 

Real consumption should grow 2.0-2.5 percent over the coming year, and may accelerate to about 5 percent YOY growth over the next four years, before the next downturn.  Here’s the chart:


Forecasted “animal spirits” in blue, real YOY consumption percentage in red.

1 comment:

  1. Well, 4 years is better than tomorrow.

    I think your model is correct. Americans like to spend and there is pent-up demand to consume. Banks may prove to be the constraint on consumption. Notice how credit card junk mail has dried up. It is more profitable and safer to broker assets than extend consumer credit.