US Economic Gloom and Canadian Obliviousness

From a Bank of Montreal report:

In normal recessions, the Fed eases monetary policy, lowering interest rates and steepening the yield curve. This reboots housing and other interest-sensitive spending, which leads the economy out of recession. Pent-up demand surges and the economy grows at a 4%-to-5% annual rate in the early recovery period.

This time, given that the Fed did not cause the recession, the Fed cannot end the recession just by lowering interest rates and steepening the yield curve, even through quantitative easing. The Fed’s policy actions, along with the fiscal stimulus and bailouts, did end the financial crisis, but the housing sector—the usual engine of economic rebound—remains deeply depressed as does consumer confidence. U.S. household net worth relative to disposable income has plunged. Indeed, according to this measurement, Canadians are wealthier than Americans for the first time since at least 1990. American household wealth has been clobbered by the combined effect of plunging house prices and lower stock prices. And while household debt in the U.S. is falling sharply, some of it reflects mortgage foreclosures—hardly the way to improve household balance sheets.

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The situation is truly dire, with a record number of Americans receiving food stamp benefits. The Senate voted earlier this month to cut $12 billion from the food stamp budget in order to help fund the $26 billion package to help states avoid teacher layoffs. As of May, a record 40.8 million Americans received federal aid through the Supplemental Nutrition Assistance Program (commonly knows as food stamps). According to U.S. Department of Agriculture figures, the number of people on the food stamp rolls has been growing to record levels for 18 straight months. Nearly $5.5 billion in aid went out to beneficiaries in May alone. The number of May recipients marked a 19% increase from a year ago. Reductions in enrollment typically lag behind changes in the unemployment rate. Many of the new recipients are unemployed and have never relied on food stamps before. Cuts in the program are devastating to the millions of now-indigent family recipients.

Given this very sad situation, this is no time for the Congress to be cutting government social spending, especially because the hiring drought might last an extended period. Emergency actions will be taken in Washington, expect fiscal stimulus.

Those are comments from north of the border by economists. They are the fantasy land "need to cut taxes" idiocy of the Republican party or the "we'll just close our eyes and hope for the best" passive response of the Democrats. Sadly, I can predict that the US legislators will ignore this advice. Instead, it is simply easier to keep playing political games.

Meanwhile, the now "wealthy" Canadians have swapped roles with the Americans. Now Canadians are becoming spendthrifts and plunging into debt:

Perhaps the best economic news of late, among a dreary lot, is that the U.S. personal savings rate is much higher than previously thought. Last week, the BEA revised up its estimate of the savings rate from 4.0% to 5.5% in Q1 and said it rose further to 6.2% in Q2. Outside of one quarter in the Great Recession, households have never saved more of their income in the past 17 years. This week, the BEA said that the savings rate climbed through the second quarter, to 6.4% in June, implying a good starting point for Q3. The savings rate is now three-times higher than before the recession and double that of a decade ago. So, after three years of pinching pennies and repaying debts, U.S. households have made substantial progress in deleveraging and are now better positioned to loosen their purse strings. True, household debts probably need to fall further, but the bulk of the improvement will likely occur through rising incomes (and defaults) rather than higher savings. Simply put, households are in better financial shape to spend than at any time in the past three years, meaning less risk of a double-dip recession. That’s the good news. The bad news is that shoppers won’t be splurging until debts fall further, so the savings rate should remain elevated in the year ahead. If personal income growth remains subdued (it was 2.3% in the past year), a steady savings rate would allow personal consumption to grow only around 1½%, the trend of the past year. Thus, a pickup in consumption depends crucially on improved job growth.

North of the border, previously-thriftier Canadians are heading in the opposite direction. By borrowing and spending faster than income gains during the recovery, Canadian households have reduced their savings rate to pre-recession levels. At 2.8% in Q1, the savings rate is down from 5.2% a year ago and almost half the level of a decade ago. Only rarely in the past four decades have Canadians saved less than Americans. While the lower savings rate has supported the recovery—consumer spending rose 3.6% in the year to Q1 despite slower 2.5% growth in after-tax income—it has also fattened household debts. A continued decline in the savings rate would be worrisome. Although Canadians aren’t quite up to their necks in debt like Americans, they could face the same brisk deleveraging headwinds that have swept through U.S. households if personal credit growth continues to outrun incomes. Higher interest rates are a sure-fire method to boost savings, something the Bank of Canada will ponder at its September meeting.

Funny, you would have thought that Canadians would have learned the lessons of their profligate cousins to the south, but human nature says we don't learn until "hard experience" leaves a lasting impression on us. Uh oh... that spells bad news in maybe 5 to 10 years in the future as Canadians suffer a financial meltdown because they didn't learn the lessons from south of the border.