Economists say Consumer Spending Is Not Going to Save the Economy

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Consumer spending, once the driving force of the U.S. economy, is likely to remain stagnant for years as households struggle to cut debt and build up savings, economists say.
Shoppers outside a Costco in Mountain View, Calif.

According to a recent study from the BlackRock Investment Institute, the ratio of household debt to personal income (wages and salaries only) remains at a staggering 154%, which is only 7.5 percentage points lower than in pre-recession peak.
“While some progress in consumer debt reduction has been made, the heavy lifting of meaningful deleveraging still lies ahead,” says the study.
Until consumers repair their balance sheets, they are unlikely to increase spending or take on any new debt even with interest rates close to zero percent.
That could continue to hamper the recovery since consumer demand makes up more than 70% of the U.S. economy.
The latest data from the Labor Department shows that consumer spending fell 2% last year, following a 2.8% decline in 2009.
Persistently high unemployment, stagnant wages, high commodity prices and overall stock market volatility are slowing the deleveraging process.
Some experts say the U.S. faces some similar risks as Japan during its so-called “lost decades.” Japan’s economic crisis of the 1990s, caused by the bursting of a nationwide asset bubble, was followed by massive consumer deleveraging and lackluster spending in the 2000s.
“Private sector continues, just as in Japan, to desire a lower level of debt,” says Scott Mather, head of global bond portfolio management at Pimco.
On a positive note, he expects deleveraging of the private sector in the U.S. to happen faster than in Japan, where it lasted 15 years. “Our real estate bubble was not as big as Japan’s, and we don’t have deflation expectations embedded in the economy,” Mather told CNBC.
Source: USA Today | Karina Frayter, CNBC.com

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