1/19/2023 0 Comments Meltdown strain![]() ![]() Moreover, this dramatic slowdown in the organic job creating capacity of the US economy is likely to be exacerbated by a sharp fall off in residential construction sector employment in the months ahead. In August and September 2007, private sector nonfarm payrolls expanded, on average, by only 52,000 per month - literally one-third the average pace of 157,000 of the preceding 24 months. The persistently subpar trend in labor income growth is about to be squeezed further by the pressures of a cyclical adjustment in production and employment. Both income and wealth effects are now coming under increasingly intense pressure - leaving consumers with little choice other than to rein in excessive demand. There was no stopping the asset-dependent American consumer. By Federal Reserve estimates, net equity extraction from residential property surged from 3% of disposable personal income in 2001 to nearly 9% by 2005 - more than sufficient to offset the shortfall in labor income generation and keep consumption on a rapid growth path. Lacking in support from labor income, US consumers turned to wealth effects from rapidly appreciating assets - principally residential property - to fuel booming consumption. That falls nearly $480 billion short of the 28% increase that had occurred, on average, over comparable periods of the past four US business cycle expansions. As a result, over the past 69 months, private sector compensation - the broadest measure of earned labor income in the US economy - has increased only 17% in real, or inflation adjusted, terms. That has been especially the case in the current economic expansion, which has faced the combined headwinds of subpar employment growth and relatively stagnant real wages. Since the mid-1990s, income support has lagged while wealth effects have emerged as increasingly powerful drivers of US consumption. Growth in US consumer demand is typically powered by two forces - income and wealth (see Figure 1). With real consumption growth averaging nearly 4% over the 1996 to 2006 interval, US consumption expenditures currently total over $9.6 trillion, or 19% of world GDP (at market exchange rates). The American consumer has been the dominant engine on the demand side of the global economy for the past 11 years. Subprime spillovers have only just begun to play out - as has the debate this crisis has spawned. It also presents the body politic with a fundamental challenge to its tolerance and, in many cases, encouragement of a new asset-dependent strain of global economic growth. Another post-bubble shakeout poses a serious challenge to the timeworn inflation-targeting approach of central banks. There is far more to this story than a potential downturn in the global business cycle. This is a much bigger problem - one that could have grave consequences for the US and the rest of the world. This time, post-bubble adjustments seem likely to hit US consumption, which at 72% of GDP, is more than five times the share the capital spending sector was seven years ago. Seven years ago, the bursting of the dot-com bubble triggered a collapse in business capital spending that took the US and global economy into a mild recession. The subprime fiasco is the tip of a much larger iceberg - an asset-dependent American consumer who has gone on the biggest spending binge in the modern history of the global economy. This will come as a surprise to policy makers and investors, alike - most of whom were counting on boom times to continue.Īt work is yet another post-bubble adjustment in the world's largest economy - this time, the bursting of America's massive property bubble. The Great Meltdown? A Subprime Outlook for Asia and the Global EconomyĪfter nearly five fat years, the global economy is headed for trouble. ![]()
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