Consumer debt crunch and division by two

Doug Henwood dhenwood at
Thu Jun 11 09:06:51 PDT 1998

Rakesh Bhandari wrote:

>Doug, you have mentioned elsewhere that this boom is among the most
>consumption-led in terms of consumer durable and housing spending, and I
>have always hoped that you would elaborate on the significance of this. As
>we are debating the effect consumer debt has had on this special character
>of the 1990s boom, it would seem that the Hayekians would emphasize the
>fragility and danger of a boom of this character.

This is ancient history by now - what, 2 days old? But I'll respond anyway.

Between the beginning of the present expansion, the first quarter of 1991, and the first quarter of 1998, consumption has averaged 67.9% of U.S. GDP, the highest of any since quarterly GDP stats begin in 1946. The bad old 1980s came in at a mere 65.4%. So what's down, in the old GDP formula (C+I+G+X)? Two of the three terms - Investment (at 14%, the lowest of the last 10 cycles) and Government (at 19.2%, the lowest of any since the 1945-48 expansion, thanks to flat civilian spending and a decline in "defense"). The trade deficit is smaller in the 1990s than the 1980s, so the drag of a negative net eXport figure is smaller.

The pattern within investment is interesting - the strongest sub-sector is "producers durable equipment," meaning machinery. Building of all kinds is down, residential and nonresidential; residential investment has picked up a bit in the last few years, but it's still below the 1946-98 average.

What does this all mean? I suppose the good news is that there probably won't be a great real estate overhang in the next downturn - not too many see-through office buildings and speculative condos on the edge of nowhere. The strength in PDE looks, on the face of it, like a good portent for the future; didn't Larry Summers and one of his many sidekicks argue that spending on machinery and equipment is the best predictor of future economic growth? But if the equipment investment consists of lots of Sun workstations in Wall Street trading rooms, you have to wonder if that rule applies this time. The low level of investment overall seems a pretty weak foundation to build a Long Boom on, but maybe I'm just lost in Second Wave, Old Paradigm kind of thinking.


More information about the lbo-talk mailing list