By Christopher Farrell
The recession is history. At least that's the opinion of Federal Reserve Board Chairman Alan Greenspan. In fact, Treasury Secretary Paul O'Neill, during his recent tour of the Middle East, denied that the world's biggest economy even fell into a traditional contraction. "It seems quite clear now that our economy never suffered a recession," he said.
Whether the downturn was severe enough to merit the official recession label is somewhat beside the point. Millions of workers lost their jobs, personal bankruptcy filings hit a record level, and business investment cratered. Still, this column has consistently argued that a fundamental transformation of the economy over the past decade -- a technology-led productivity boom, the spread of equity ownership, organizational changes geared toward creating more flexible companies, and labor-market innovations -- would limit the first downturn of the Information Age.
Resilient American consumers unexpectedly shored up the economy during the downturn, especially considering the tragic events of September 11. Consumers bought cars, homes, and other goods at a sturdy pace in recent months. As an overseas friend told Hugh Whelan, senior portfolio manager at Aeltus Investment Management: "There is no sort of unhappiness that Americans are unwilling to lessen through increased consumption."
That spending spree is now a growing concern. A number of economists have pointed out with alarm that the consumer-debt burden as a share of disposable income is just shy of a record high. The personal-savings rate is at a meager 1.8%. The worry is that household finances are stretched far too thin. The fragile economic rebound could collapse as cash-strapped consumers sharply rein in their spending. But the odds are the consumer is in better shape than this dark scenario suggests.
In fact, even though Americans are considered profligates compared with the spendthrift Europeans and Japanese, domestic balance sheets are in better shape than those of their peers elsewhere in the world. The ratios of financial net worth to income and financial assets to income are higher in the U.S. than in the other G-7 countries.
Americans are not spending with abandon, mindlessly trying to drown their fears with visits to the shopping mall and taking on credit-card debt they can ill afford. Consumer spending is robust because households with employed adults are doing well. Inflation-adjusted salaries were up a hefty 3.5% December-over-December, according to Edward Yardeni, chief investment strategist at Deutsche Banc Alex. Brown. Jim Paulson, chief investment officer at Wells Capital Management, notes that the falling rate of inflation has in fact boosted consumer purchasing power by 12% over the past five years.
The U.S. savings rate also is understated. Government statisticians typically nudge up household savings and income in almost every annual revision of gross domestic product. Including capital gains income, which isn't counted in the official savings measure, would also boost the personal-savings rate. Last year, the official savings rate was 1.6%, but including capital gains would have increased it to 8% (and that's despite the dramatic decline in the stock market), according to calculations by Merrill Lynch economists Bruce Steinberg and Mathew Higgins.
Indeed, pockets of severe financial stress, especially among low-income households, continue to exist. And even as the economic recovery gains momentum, it will take some time for those families to regain their financial footing. But overall, the American household is in sound financial shape -- and that augurs well for the strength of the expansion now under way.
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online
Edited by Beth Belton