Sometimes I forget economics is a complex world of variables and influences. Often, I reduce that complexity to simple conclusions, such as if the consumer is spending, an economy will grow. Although that is true in principle, the reality is the rate of growth depends on how much the consumer is spending, which makes the following quite thoughtful.
If you want to know why economic growth has been so tepid, here’s your answer. Four years after the storm hit, the economy is still deleveraging. And it’s very hard for any economy to grow when everyone is focused on increasing their savings.
Although it is hard to imagine anyone putting money in a savings account, I agree with the point – Americans are deleveraging, a point I have often raised in the past, but have forgotten in the present. It is constructive to keep this point in mind, as deleveraging is good, but in a tight economy it can be bad because if the consumer is to spend, he or she will need to borrow money. This reality is a sober reminder the US economy is dependent on the consumer, and until there is more cash flowing in the system (i.e., more hiring), the rate of growth is dependent on how much the consumer is borrowing, which is less than what is needed right now for robust growth.
As I said earlier, economics is a complex world of variables and influences, and in that complexity swirls the notion of free cash flow. True, consumers might be deleveraging, meaning not spending as much so they can pay down debt or save money, but one variable that can change is the price of food and energy. Currently, those prices are stable or going lower, so even if the consumer is putting x amount toward debt or savings each month, his or her free cash flow is increasing. This is the spark that will spur more hiring, eventually, which then turns into the flame that heats up the economy. True, the variables and influences for that to happen are complex, but the reality is simple – when consumers spend more, the economy moves forward.
Here is one more point for your consideration. We live in a complex world of variables and influences, but we humans who inhabit that world are not complex. In fact, we are predictable in many ways, driven by basic needs, thus acting accordingly. In the case of deleveraging, both consumers and business will, at some point, feel “safe,” and when that happens, the need to squirrel away nuts will morph into a sense of liberation. This is particularly true with business, as the total of “stored nuts” still exceeds $2 trillion. At some point, business will feel the investment environment is more certain. Then, the free cash will begin to flow back into the economy, hiring will happen, consumers will spend, wages will rise, inflation will tick up, interest rates will rise, and saving money will be rewarded with at least a nominal return.
The trade deficit narrowed in April, as both imports and exports fell from record high levels. Both imports and exports were still the second highest on record [however].
Even with the deleveraging, things are not so bad economically, a reality the market is beginning to absorb. Anecdotally, right here in San Luis Obispo, CA, one of the most expensive places in the US to live, with an economy dependent on government jobs and tourism, things are getting better. The headline in today’s local paper reads, “Brighter year forecast for economy.” The article points out that tourism is up, the housing inventory is dropping, and the jobs outlook, although not great, is stable. Okay, business, start releasing some of those stored nuts. It is safe to do so.
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