The U.S. economy, measured by GDP, is generally broken down into four parts: consumption, investment, government spending and net foreign trade. The question is, where is the growth going to come from? None of the above provides a suitable answer.
The economy grew by an average of 3.1% for the years 1998 through 2008. Consumption accounted for 2.5%; investment accounted for 0.5%; government accounted for 0.5%; and net trade was a negative 0.3%.
Consumption is the largest portion of GDP, accounting for 71% of GDP in the second quarter of this year. That compares to 67% for calendar year 1998 and 70% for 2008. The economy is clearly dependent on the consumer for most of its growth and the consumer obtains the ability to consume from take-home pay, transfer payments, drawdown of wealth and borrowing.
Simply put, consumer wages depend on being employed as well as the level of pay. Employment is not expected to grow until the second quarter of 2010. Take-home pay may increase for hourly employees as average hours per week increase, but that will not add significantly to overall pay. Non-hourly employees may see a reduction in downtime (enforced periods of unemployment) that may lead to an increase, but again it is not a significant amount. In fact, most of these increases will likely go to pay off revolving debt where we see increasing levels of late payments and defaults. Disposable income grew an average of 5.9% from 1998 to 2008. It will be a while before we will see that level of real wage increase again.
We can turn to transfer payments to add to disposable income. Increasing the period of eligibility for unemployment benefits is one way, but that has consequences like increasing debt. But no one is concerned with that right now. Social security payments do not keep up with the rate of inflation, so that does not appear to be a net add to the consumers' ability to increase consumption.
Drawdown of wealth is evident in the increased number of personal bankruptcy filings. It is clear that the decline in the stock market (still down nearly one-third from its previous peak) does not provide for consumption if investors are only looking to recover the level of wealth previously held. In addition, home values have declined to the point where there is not only significantly reduced homeowner equity, but also outright negative wealth for those with mortgages in excess of market value.
That leaves borrowing. Funds are now available for the most creditworthy; unfortunately, they are not looking to increase personal consumption through borrowing.
Maybe we can look to net foreign trade for some economic growth. Not so fast. With a declining value of the dollar, exports become cheaper and imports more expensive. One would think that exports will increase significantly under this scenario, but that requires demand from the rest of the world.
Investment in residential construction will not grow as housing starts are slow to rebound, and when they do, the average price for a new home will decline from previous years as smaller, more affordable homes become a larger percentage of the building boom. That leaves government spending. State and local governments account for 60% of government spending. We already know what shape they are in. The thought that the Federal government will cause this economy to grow is a stretch. It remains in the hands of the consumer, pure and simple.