The Dead Weights of American Growth

The pace of business in the United States has now fallen below its midterm trend. This is because of the persistent real estate crisis and unemployment, which will weigh down household consumption for a long time.

Two months from the midterm elections, a bad wind is blowing over the Obama presidency, notably on the growth front. A battery of indicators published recently gives the picture of a shaky economy: the plunge in home sales, confidence at half-staff, the decline in license registrations, unsteady industrial production forecasts, a new explosion of real estate foreclosures. … The acceleration of business, which had been obvious at the beginning of the year, is truly over, and the American engine should post growth under a 2 percent annual rate in the second half of 2010 — greatly below its tendency at midterm. Reflecting this deterioration in circumstances, the stock exchange is depressed. The S&P 500 has lost 10 percent compared to its April peak. This relapse does nothing to help households restore their financial footing.

It is the consumer that is at the heart of the American relapse. Even if households are saving again, their budget adjustment is far from over: The decline in debt is not enough to offset their loss of wealth. Indeed, while housing prices continue to plunge, the default rate on real estate loans is now approaching 10 percent. After the wave of “subprimes,” it is now the “Alt A” loans, of average risk, that could overburden bank balances.

As long as unemployment has not reached its high point, household consumption is not ready to reboot. In order to restore profit, American businesses have had massive layoffs, and the unemployment rate could reach 9.7 percent at the end of the year — higher than in France! But the American compensation system is much less generous. 45 percent of unemployed Americans have now been without work for more than six months — 20 percentage points more than during the last recession. And a good portion of them are going to be out of the compensation system by the end of the year — suddenly increasing the poverty level. Not enough to boost growth.