While the euro zone and its self-inflicted debt woes retain their grip on policy makers' short attention spans, another bunch of debtors whose future may be more crucial to the fate of the global economy have been getting little love or attention.
That would be the once redoubtable American consumer, whose profligate spending and insatiable demand for cheaper stuff were key drivers of U.S., Chinese and global expansion for years. Today, these reformed shopaholics are a subdued lot, still digging their way out from under mountains of debt at a time when job prospects are growing dimmer, wages are stagnant, markets are downright scary and their personal assets – from houses to savings and securities – keep eroding in value.
In other times, a worried populace might have looked to Washington for some shreds of hope that the curtain of gloom will soon lift. But the bitterly divided political parties are so dug in to their ideological trenches that they offer no hope of constructive initiatives or even sensible compromises. And the Federal Reserve has managed to gum things up even more, through a series of increasingly desperate policy moves designed to get an ailing economy out of sick bay.
So it should come as no surprise that American consumers are mired in their deepest funk since the darkest depths of the Great Recession in 2009. Don't be fooled by the latest sentiment reading, which shows people have turned a tad more upbeat on the economy. These gauges rise and fall with the headlines and stock market performance; and we know where the latter has been heading. More significant is the fact U.S. personal incomes declined in August for the first time in nearly two years and real spending turned flat, after showing some signs of life the previous month.
In short, it's still a bleak landscape filled with "zombie consumers," in prominent economist Stephen Roach's depressing picture.
"The concept has been validated by the numbers," says Mr. Roach, a Yale University fellow who made his considerable reputation as a frequently bearish chief economist (with a bullish China slant) at Wall Street heavyweight Morgan Stanley.
Indeed, growth in consumption in the United States over the past 14 quarters has amounted to a dismal annual average of 0.2 per cent, adjusted for inflation. That figure encompasses the first six quarters of 2008-09, when consumer spending fell 1.6 per cent, followed by an anemic rebound in subsequent quarters of 2.1 per cent.
"That is a very weak recovery, especially in light of the unprecedented decline in the preceding quarters," Mr. Roach says. "Never before has the U.S. consumer – the biggest consumer in the world – been this weak for this long. Never."
Just to compare what life was like before the financial storms struck with a vengeance in 2008, U.S. spending grew an average of 3.6 per cent annually in the preceding dozen years.
Consumers still account for about 70 per cent of the U.S. economy, down from a peak of 71.3 per cent before the housing bubble burst. But Mr. Roach sees that portion sliding closer to the Canadian level (64 per cent last year). All of which spells shrinking volumes and revenues for Chinese and other major providers of products and services to the vast market.
"It is an outgrowth of a very wrenching balance sheet recession that was brought about by the bursting of the property and credit bubbles, which left consumers with too much debt and not enough savings. So consumers have naturally cut back spending and have begun to repair their balance sheets," Mr. Roach says.
"But I stress the word 'begun' because, while debt-to-income ratios are down. they're still well above the norms of the preceding three decades. So there's a long way to go on the road to balance sheet repair."
It's a rocky road made even more treacherous by the folks responsible for fiscal and monetary policy. "It's contributing to sort of a corrosive erosion in psychology and expectations about the integrity of the U.S. policy apparatus," Mr. Roach says of the current Washington gridlock. And on the monetary front, the Fed is getting "increasingly diminished returns from its ever creative efforts to use unconventional tools."
What would he do differently if he happened to find himself in Fed chief Ben Bernanke's uncomfortable shoes? "I'd own up to the fact that the central bank is limited, as we've learned from Japan, in dealing with ongoing balance sheet adjustments. If anything, monetary policy should be aimed at accelerating the pace of balance sheet repair."
Among other things, the Fed should stop penalizing savers by bringing historically low interest rates back to something approaching normal. "Americans who are savers are getting squeezed in a way that they've never seen. Their interest income has gone to zero. How are you going to get consumers back in a spending mode if they're making nothing on their fixed-income investments?"
Mr. Roach will offer his latest global prognosis Tuesday evening in Toronto at the annual financial analysts' forecast dinner. It might be a good idea to eat dessert first.