America’s Zombie Consumers

June 16, 2011
Stephen S. Roach
Morgan Stanley Asia
The global economy is being hobbled by a
new generation of zombies—the economic
walking dead. The American consumer
is in the early stages of an unprecedented
retrenchment. In the 13 quarters since
the beginning of 2008, inflation-adjusted
annualized growth in consumption has
averaged just 0.5 per cent. Never before in
the post-World War II era have US consumers
been this weak for this long.
The zombie syndrome has an important antecedent. It was,
in fact, a key symptom of the Japan disease, which led to
the first of two lost decades for that country. Encouraged
by the government, Japanese banks kept extending credit
lines for a broad cross-section of insolvent companies—
postponing restructuring and inevitable failure.
Japanese productivity growth weakened dramatically as a
result of the ensuing “zombie congestion”. The lifeline of
policy-driven bank lending allowed bankrupt companies to
hang on to excess workers and redundant capacity. But that
sapped post-bubble Japan of sorely needed vitality.
It’s comparable in post-bubble America. After a record
buying binge that lasted a dozen years, US consumers were
stretched as never before. Consumption excesses were built
on the precarious foundation of two bubbles—property and
credit—both of which have now burst.
Since early 2008, inNaticn-ad|usted US
ccnsumpticn ercwth has averaeed |ust 0.5%
an unprecedented shcrtfall frcm earlier ncrms.
It will take a long time for American consumers to recover
from the ravages of this bubble-induced spending binge.
Deleveraging, the paying down of excess debt, has barely
begun. Yes, household sector debt came down to 115 per
cent of disposable personal income in early 2011. While
that is 15 percentage points below the peak ratio of 130
per cent hit in 2007, it remains well above the 75 per cent
average of the 1970 to 2000 period.
A similar pattern is evident on the saving side. The personal
saving rate stood at just 4.9 per cent of disposable income
in March and April 2011. While that’s up from the rock-
bottom 1.2 per cent in mid-2005, it is far short of the
nearly 8 per cent norm that prevailed in the last 30 years of
the 20th century.
Like Japan’s banks, Washington policymakers are doing
everything they can to forestall rational economic
adjustments. The Federal Reserve has conducted two
rounds of quantitative easing in an effort to get consumers
to start spending the wealth effects of a policy-induced
rebound in equities. The Congress and the White House
have embraced home-foreclosure containment programmes
and other forms of debt forgiveness.
Like Japan, Washinetcn pclicymakers are
fcsterine "zcmbie ccneesticn" by attemptine
tc fcrestall raticnal eccncmic ad|ustments
thrcueh initiatives such as 0E2, fcreclcsure
ccntainment, and debt fcreiveness.
The aim is to get zombie consumers to ignore their festering
problems and start spending again—irrespective of the
wrenching balance sheet damage they suffered in the Great
Recession. The subtext is Washington condones a revival of
reckless behaviour.
Unsurprisingly, US consumers are smarter than US
policymakers. With both fiscal and monetary policies
on unsustainable paths, households know that these life
support efforts are temporary, at best. That means they need
to take matters in their own hands. Sub-par labour income
Note: This article was published in Financial Times cn June 16, 2011 under the title cf "Hcw zcmbie US ccnsumers menace the wcrld eccncmy".
2
generation and historically high unemployment and under-
employment for 24m Americans only underscore the need
for belt-tightening.
Spending retrenchment, deleveraging, and saving are the
only sustainable options for America’s zombie consumers.
That’s especially the case for 77m ageing baby boomers—
the first of whom are now hitting retirement age.
Like Japan’s zombies, there is no quick end in sight to the
chronic weakness of American consumers. I suspect it will
take a minimum of another 3 to 5 years before debt loads
and saving rates have been restored to more sustainable
levels. With consumption still about 70 per cent of gross
domestic product, that points to sharply reduced growth
in the US economy—unless America is quick to uncover
a new and vibrant source of growth. Policy paralysis in
Washington is hardly encouraging in that regard.
There are important implications for the global economy.
A protracted shortfall of the world’s biggest consumer,
as well as weakness in Japan and debt-ravaged Europe,
spells lasting pressure on external demand for export-led
economies. Barring a quick rebalancing towards internal
demand, so-called growth miracles in the developing world
could be in for a rude awakening.
American ccnsumers are smarter than
Washinetcn and are likely tc ccntinue
deleveraeine and rebuildine savinepcintine tc
subdued ccnsumpticn ercwth in years ahead.
Sadly, America’s zombie consumers could be more
problematic for the US than Japan’s zombie corporates
were for the Japanese economy. At 70 per cent of GDP,
US personal consumption is 3.5 times the peak share of
Japan’s bubble-distorted business capital spending sector
in the early 1990s. A failure to learn the lessons of Japan—
especially that of post-bubble zombie congestion—leaves
the US and the global economy in a very tough place for
years to come. Growth hungry financial markets could be
very disappointed.
Stephen S. Roach, a member of the faculty at Yale
University, is Non-Executive Chairman of Morgan Stanley
Asia and author of The Next Asia (Wiley 2009).
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