PROVIDENCE – The stock market is up. Fewer jobs are being cut. Stimulus money and easy credit are flowing out of Washington. Many people add it all up and see the recipe for an economic recovery.
Not so fast, according to some economists and Wall Street forecasters, who say an upturn may be hampered by the United States’ record-high levels of consumer debt, The Wall Street Journal reported today.
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The Federal Reserve estimates household indebtedness peaked in late 2007 at 132 percent of disposable income. That was the highest level since at least 1945 – nearly four times the 36 percent ratio in 1952 and almost double the 69 percent ratio recorded in 1985, The Journal reported.
The ratio was down to 124 percent by the end of March as Americans increased their savings and paid down or defaulted on their debts, the paper said.
Since consumer spending drives 70 percent of the U.S. economy, forecasters say the dampening effect of their new thriftiness could push economic growth down for years.
Economists at Goldman Sachs Group Inc., for example, are projecting inflation-adjusted growth of 3 percent in the second half of this year, but for 2010 they see only 2 percent growth in the first half and 1.5 percent growth in the second half, The Journal.
“Consumers are under significant financial pressure,” Goldman wrote in a report quoted by the paper. “The weakness in household income – partly resulting from the sharp slowdown in hourly wage growth – will make it harder to raise saving without significant constraints on consumption.”
Nor are consumers the only ones carrying a heavy debt load. Bloomberg News reported last week that the ratio of U.S. total debt to gross domestic product hit an eye-watering 372 percent in the first quarter.
That means the nation owes more than three times its annual economic output in combined private and government debt, which totaled roughly $52 trillion at the end of March.
Comstock Partners, a money management firm founded and run by the contrarian investment analyst Charles Minter, argues the process of paying it all down could lead to two decades of sluggish economic growth, similar to what Japan has experienced since the early 1990s.
Government efforts to boost the economy are unlikely to “solve a problem of excess debt generation that resulted from greed and living way beyond our means,” the firm wrote in a report published on its Web site last week. “We could wind up with a lost couple of decades.”
