The Great American Bubble - from Morgan Stanley global economic
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US: The Great American Bubble
Stephen Roach (New York)
It's now official. Courtesy of the annual reworking of the national income accounts, a strikingly different picture of the US economy has just been unveiled. Based on statistical revisions back to 1995, America now looks far more saving-deficient and wealth-dependent than the previous data had indicated. In my view, such a revision places the US economy on a far more precarious footing than previously indicated. It also has profound implications for real interest rates, monetary policy, the business cycle, and the stock market.
First, the numbers: The earlier data of record placed the personal saving rate at just 3.6% in 1Q98. Reflecting a major reworking of these figures by the US Bureau of Commerce, the saving rate has been lowered to 1.2%; moreover, it is now estimated to have plunged further to just 0.6% in 2Q98, two full percentage points below the downwardly revised 2.6% reading of just a year ago. A broader historical perspective says it all: Over the 40-year interval, 1950-89, the personal saving rate averaged 7.7%. Currently, the saving rate is at its lowest since the Great Depression years of 1932-34 period, when the household sector actually drew down its reservoir of aggregate saving and took the saving rate into negative territory.
What lies behind this revision? It is largely traceable to a statistical reworking on the income side of the national accounts. Over the three-year interval, 1995-97, disposable personal income was lowered, on average by $81 billion -- equivalent to about 1.5% of previously estimated levels. Largely as a result, over the period covered by this revision, 1Q95 to 1Q98, average annualized growth in real disposable personal income was reduced by 0.5 percentage point, whereas average growth in real personal consumption expenditures was increased by 0.3 percentage point. Consequently, the cumulative change in household sector outlays over the past 14 quarters now stands at 25.8%, fully 2.7 percentage points above the 23.1% expansion in disposable personal income over the same period. With consistently less income growth and more spending growth now evident in the personal sector over the past three years, saving -- defined in the national accounts largely as a residual between these two flows -- has fallen like a stone.
All this is another way of saying that the spending habits of the American consumer have drawn increased support from purchasing power generated outside the traditional income stream. The obvious culprit is the powerful wealth effect from the great bull markets of the 1990s. In his recent midyear report to the Congress, Fed Chairman Greenspan indicated that Fed estimates now place household sector asset appreciation at $12.5 trillion since the end of 1994; using a traditional 5% "wealth effect" estimate, that would put the incremental injection of household purchasing power over the next several years in the $600 billion vicinity -- more than enough to fully account for the gap between income generation and consumer spending growth that has now emerged with a vengeance.
What are the implications of this development? First of all, there is now good reason to question the staying power of the consumer-led growth spurt that has fueled the US economy since mid-1996; in part, that's because the household sector is totally lacking in a saving cushion that could normally be counted on to guard against any unforeseen developments. Second, the wealth dependency of the US economy now seems far more significant on the basis of these revisions; moreover, with American far more exposed to equities as an asset class than at any point since the mid-1960s, there is now better reason than ever to fear the linkage between a correction in the stock market and the real economy. Third, little wonder that real interest rates have remained well above historical norms; in a saving-short economy, that's exactly what would be expected. Fourth, the Fed must now regret more than ever its unwillingness to prick the "irrationally exuberant" equity bubble; with the stock market having subsequently risen by around 40% since Alan Greenspan first went public with his concerns in this regard in late 1996, the ensuing bubble has played a key role in pushing US economic growth well beyond its inflation-stable speed limit. Needless to say, the key lesson of a post-bubble, wealth-dependent Japanese economy is particularly relevant in this regard: The longer a central bank waits to pop an asset bubble, the worse the after-shocks.
Over the years, I've lived through countless statistical overhauls of the empirical framework that delineate the structure of the US economy. One of the most memorable for me came in the summer of 1974 when I was earning my stripes as a forecaster at the Federal Reserve Board. At that juncture, a major reworking of the national accounts revealed a previously undiscovered inventory overhang. That was the moment when the lightbulb finally went on for then Chairman Arthur Burns. Up until then, he was in denial over the possibility of recession. The statistical revision left little doubt as to what was in the cards -- the worst recession of the post-World War II era. I've never forgotten that lesson. Now some 24 years later I must confess that I am equally staggered by this dramatic reworking of the saving and wealth characteristics of the US economy. The great American bubble has the clear potential to change everything. |
