Ask An Economist

Matt asks me to comment on this article.

'A Recovery Only a Statistician Can Love'

Data That Point to Improving Economy Also Suggest Continued Pain for Many

The big takeaway I would like to add is this: in the past recession have been pulled out via increased consumption. In a time of recession, people stop buying things, and as job prospects improve, all the deferred consumptions (think cars, washer/dryer etc) that people put during recessions are purchased during recoveries. This adds up to more jobs and more factory orders in time of economic expansion.

In fact, past recession have shown a pretty consistent pattern: the more severe the recession, the bigger the following economic recovery. The story above contributes to this "V" bounce dynamics.

Few economists expect it to be the case this time. Even though this is the worst recession in 50 years.

The big reason is that consumers are tapped out. Right now the private debt (not national debt, but private debt) to income ratio is about 1.3. In other words, the average American has more debt (credit car, mortgage, car loan) than he makes in a year. And this makes increasing consumption post-recession an iffy proposition. To put that debt load in context, 50 years ago the ratio was more like .6.

We would love to be wrong, of course....