Monday, June 4, 2007

Production, Consumption and A Bet

I looked a bit further into the make-up of US jobs and produced a couple of telling charts (click to enlarge). In sum, the US economy has gone from "making things" to "consuming things". Since 1950 the percentage of all private jobs in "making things" has gone from 45% to 19%, while those in retail, leisure, health and education have jumped from 24% to 41%.

US Jobs by Type (Data: BLS)

Real earnings for workers (80% of the labor force) are still well below the 1970's highs, since service jobs in the above sectors typically pay less than jobs in production. There is much less value added by a Mart greeter or a burger flipper than a Ford assembler, so real incomes stagnated.

Real Average Hourly Earnings For Private Employees (Data: BLS)

As to the "bet" in the post's title: Analysts in Wall Street constantly remind us to "...never bet against The American Consumer." He/she is the veritable engine that drives the US economy, at least in GDP and corporate profit terms. The propensity to constantly consume has become very pronounced in recent years, as shown in the collapsed personal saving, now running at a negative $100 billion/yr.

Annual Personal Saving - $ Billion (Data: St. Louis Fed)

Having cast away its industrial and export base, the US has become one giant "leisure-class" economy exclusively dependent on personal spending to sustain it ("..I encourage you all to go shopping more", G.W. Bush). Negative saving means that Americans are spending more than they are earning, a situation not seen since the Great Depression under very different conditions. Since their incomes do not suffice to maintain their lifestyle, they are making up the shortfall by borrowing and/or selling assets - clearly a situation that cannot last for long.

The odds that consumers will keep spending with reckless abandon are getting longer by the day, because a) foreigners may stop providing vendor finance and b) Americans may suddenly wake up from their consumption-induced haze and seek to build up savings again. By the same logic the massive boom in assets, debt and debt-related business (banking and finance) may soon come to an end.


5 comments:

Fran├žois said...

Hi Hellasious,

You are possibly a bit overly tough on recent US achievements.

On the hell side, everything you mentioned. The worse part is clearly the overconsumption in all areas including energy.

On the right side, US has made this Internet and your very blogging
possible. This information society is a great american achievement. US contribution to it is paramount and money-making.

Well the adjustment of the US consumer (just less...) is the issue to-day and for a couple of years.

We can expect that most Americans will go through nicely. but it will be extremely tough on those over-indebted.

Can we expect America to invent its own incarnation of the "social-democracy" in order to cope with the coming colateral social disorders? I reckon so.

China getting awfully capitalist, America possibly turning socialist and Europe peaceable... Curious times.

Alex Zeissig said...

hellasious,

To date, the federal reserve's strategy has been to maintain the loose monetary conditions required to inflate asset values. Inflated assets, like homes, were then borrowed against to maintain the American consumer's lifestyle despite stagnating real wages.


The federal reserve was counting on US job and income growth, driven by export based demand, to eventually kick in and pick up the slack as the residential property bubble was slowly deflated. Clearly. that is not happening as planned. Export demand has not picked up sufficiently despite major dollar devaluation and the property bubble is deflating much faster than the fed apparently anticipated.


Not just low interest rates, but also a hands off approach to regulatory oversight, was required in order to create an environment where lenders were allowed to originate exotic mortgages destined to default. In addition, the federal reserve abdicated its oversight responsibilities in regulating commercial loans as well.

The bubble in non-residential construction is apparently peaking and has, thus far, managed to keep the economy out of an official recession. Before the year is finished I anticipate the wheels will start to fall off non-residential construction as well.

There was a fascinating article in Bloomberg discussing complaints by CDO investors against lenders, who in their capacity as loan servicers, are now modifying residential mortgages in order to avoid paying out on defaulted mortgages which the lenders insured. We are going to start seeing a lot more articles about major conflicts between CDO investors, lenders and rating agencies.

It is interesting that as we move into the 1st major wave of adjustments in ARMs over the summer, the 10 year treasury rate is threatening 5%.
Refinancing into a 30 year fixed rate is going to be a lot more expensive than 2-3 months ago.

The question remains what the federal reserve will do as asset deflation sets in.

Most likely, the federal reserve will reduce interest rates. But my own best guess is that in an environment where lending conditions are becoming more restrictive merely reducing interest rates will be insufficient. I foresee an environment where despite lowered treasury rates all along the yield curve, yield spreads will continue to widen and lenders will no longer be willing to readily extend credit.

I don't expect the tightened lending environment will be limited to residential mortgages. It will spread like contagion to commercial, consumer and corporate debt domestically and globally.

If the decision isn't already made for it by hedge funds and foreign central banks, the federal reserve will then be in the unenviable position of either monetizing all forms of debt in an effort to reinflate or simply let debt liquidation proceed while taking measures here and there seeking to preserve the dollar based global monetary system.

Anonymous said...

Your argument sounds more akin to the exact same conditions that existed during the economic contraction of the 1930's in the U.S.

"Negative saving means that Americans are spending more than they are earning, a situation not seen since the Great Depression under very different conditions. Since their incomes do not suffice to maintain their lifestyle, they are making up the shortfall by borrowing and/or selling assets - clearly a situation that cannot last for long.

The odds that consumers will keep spending with reckless abandon are getting longer by the day, because a) foreigners may stop providing vendor finance and b) Americans may suddenly wake up from their consumption-induced haze and seek to build up savings again. By the same logic the massive boom in assets, debt and debt-related business (banking and finance) may soon come to an end."

Hellasious said...

Thanks to all for your comments.

Francois: Certainly the US has made tremendous achievements, particularly in the information tech and telecom areas. Is this enough to replace all the mfg. jobs lost to ultra-low cost producers in East Asia? Clearly, it is not.

Alex: The US may have been counting on exports to make up for the slowdown BUT... export WHAT? If you exclude Boeing, Microsoft, iPods and Starbucks the utter emasculation of the US industrial base has left it with a cheap currency and nothing to sell against it...That B'berg article was fascinating indeed - I read it.

Anon: I really hope we don't end up like the 1930's, but as you said there are similarities all over the place.

Mane said...

Considering 1930s: in addition to the financial situation, we are reaching the end of cheap energy, especially oil. This will make everything more expensive, for there is nothing which could replace oil in its myriad uses.

In the worst case, the debt bubble bursts because of sudden increase in price of oil, maybe because an US attack on Iran. That would change the world overnight, I assume.