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The Wilder View

The Misunderstanding of “Debt-Fueled Consumption”

Today I plan to rant just a bit about consumption because I was reading Yves Smith’s article today, and she referred to “debt-fueled consumption” – the now pejorative phrase that just rolls off the tongue. She says:

“no where does the article [referenced WSJ article in her post on the consumption share] acknowledge that the consumption level was unsustainable and debt fueled.”

And this is where I get just slightly irked, because it seems to me that the phrase “debt-fueled consumption” strikes the following chord: every American household was loading up on home equity debt just to buy big ticket items like Hummers and large sofa sets with cup-holders galore from Jordan’s Furniture (a discount furniture shop in the Boston area – generically, every city has one).

I am sure that Yves Smith knows this, but the debt-fueled consumption was more likely paying surging health care bills than buying cute kitchenettes.

Myth 1: The years of debt-fueled consumption went into goods spending, jumping the consumption share of GDP to an excess of 70%.

consumption_share_chart.PNG

Reality: The goods share of total consumption has been falling quite dramatically, while the service component surged. Therefore, it is more likely that the debt fueled consumption was going predominantly into the service component (paying service bills).

In Q2 2009, 25% of service spending went to health care – outpatient services (physician, drugs, dentist) or hospital and nursing home services – and 29% of service spending went to housing and utilities – rent, water, electricity, and trash. As such, over 50% of service consumption is more likely to remain stable, even rise faster, with the Boomers out there.

And as for the speculation that workers are postponing retirement due the drop-off in wealth, and consumption will be meager into the medium term, I simply don’t buy it. If anything, the aging population is going to fuel recovery – no matter when they choose to retire. Service sector consumption growth – much of it based on health care consumption – will simply become a larger share of GDP growth (cutting out autos, perhaps), and pick up some of the slack.

And here’s another thing. Myth 2: durables consumption – i.e., autos and furniture – are important contributors to the initial stages of the recovery. It helps, but service consumption is the biggie.

contribution_growth_chart.PNG
 
The chart lists the average contribution each GDP component during the initial year of recovery spanning the 1950-2007 (nine recoveries in total).
 

Reality: The average growth accumulated during the initial stages of recovery (1-yr following the recession’s end) following the last nine recessions is a remarkable 6.43% (consensus forecast for growth in 2010 is currently 2.3%). Only 0.47% of that came from durable goods. A huge 1.67% of that stemmed from the service component of consumption (again, health care and housing).

And as long as service spending rebounds, so too will the economy – even without a big pickup in autos. Inventories are almost a foregone conclusion, the residential construction sector is bound to pick up – 500-600k units is simply unsustainable for a US population that is growing at roughly 1% a year, and growth rates on such a small base can be large.

And here’s another link to jobs that has not been incorporated to many forecasts – growth in jobs means new health care insurance, means added spending on health care.

I could go on, but I won’t.


Originally published at News N Economics and reproduced here with the author’s permission.

9 Responses to “The Misunderstanding of “Debt-Fueled Consumption””

AnonymousAugust 21st, 2009 at 1:13 pm

Debt-fueled consumption was more likely paying surging health care bills than buying cute kitchenettes. Not TrueI have a large array of friends and acquaintances. I have not heard one instance of people loading up on debt to pay health related items.To the contrary, most have used their home like an ATM to finance things like children’s education, travel, cars, cute kitchenettes, etc. Not health care

AnonymousAugust 21st, 2009 at 1:49 pm

Rebeeca,What are you smoking? You are delusional. Health care my arse. People used their houses as atm machines and most people are way over leveraged in debt. The de-leveraging will take years. Why do you think the baby boomers will start consuming again. There 401k’s are down to nothing. Most are upside on their houses.Companies still are not hiring. Tent city’s are nationwide. Get a clue girl..

jimsumAugust 21st, 2009 at 4:15 pm

I don’t see how the phrase “debt-fueled consumption” is incorrect. Yves quoted consumer spending as 70% of the economy, so she couldn’t have been referring to goods production alone. Whatever was consumed, it appears to have been unsustainably financed by debt.

GuestAugust 23rd, 2009 at 9:04 am

Even if people spend over 50% on healthcare and housing, that consumption is not “stable” at all. People drop health coverage if they can no longer afford it, and people foreclose on houses if they cannot keep up with the payments.Healthcare consumptions are in no way “stable”.

AnonymousAugust 28th, 2009 at 5:34 pm

This has to be one of the lamest posts I have ever seen…The folks over at Calculated Risk have published the Kennedy-Greenspan MEW statistics for several years now. They rather nicely track home prices, not health care costs.Worse, the household sector saving rate has soared over the last 12 months. Presumably this means that health care costs have plunged. On what planet would that be?However, I do have an “insight” for the author. U.S. combat deaths in Afghanistan have risen rapidly of late.Clearly a health care costs problem.The Atlantic hurricane season has been very light so far.Clearly a consequence of rising health care costs.

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