The prospects for domestic demand in the US are not bright. The labor market barely generates jobs and fiscal policy is a drag. Americans are consuming, but there’s unlikely sufficient nominal income growth to stabilize consumption expenditure growth at current levels.
We’ve seen years where consumption growth outpaced income growth, but those periods of consumption were financed through leverage build – with financial conditions tight, the possibility of financing consumption outside the labor market is deteriorating (see the Banking and Finance section of the latest Fed Beige Book, not encouraging).
Consumption growth cannot outpace income growth indefinitely. Unless we get a true policy kick (by fiscal policy, admittedly), the cyclical recovery could be a thing of the past.
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That was nominal growth – in real terms and on a historical basis, the story is just as bad. Don’t let anybody tell you that's real consumption growth. At 1.8% Y/Y in August is anything but miserable, especially given that its annual pace is 1 ppt below the long run average, 2.8% Y/Y. Long run real income growth is even worse at 2.5 ppt BELOW the long run average, 2.8% Y/Y.
Uh huh – yes, the US economy has definitely avoided the ‘recession scare’…right. As I see it, the problem with policy these days is not size nor level, rather complacency.