Positive third-quarter economic statistics have been greeted with cheers and proclamations that the “Great Recession” is over, but Steven Fazzari, Ph.D., professor of economics in Arts & Sciences and associate director of the Murray Weidenbaum Center on the Economy, Government, and Public Policy, is not convinced that it’s time to celebrate.
Consumer spending, the engine that fueled economic growth for the past two decades, is “out of gas,” Fazzari said. “I continue to worry that the household sector cannot support growth over the next few years the way it did before the recession.”
With consumer spending accounting for 70 percent of the gross domestic product (GDP), he considers it a “matter of arithmetic” that the economy will stagnate over the next few years if American households curtail their spending and borrowing to repair their balance sheets.
“We may see a good quarter here or there,” Fazzari said. “But there is no obvious source of medium-term sales growth for business in the next few years to replace the recent consumption boom.”
Fazzari documents the extended consumer shopping spree that fueled economic growth in a paper published last year with recent WUSTL graduate Barry Cynamon titled “Household Debt in the Consumer Age — Source of Growth and Risk of Collapse.”
The research shows how consumer spending was accompanied by a dramatic rise in household indebtedness over the past 20 years. “We were funding consumption with unsustainable growth in household debt,” Fazzari said.
His research argued that household spending created a source of growth for the economy but he also predicted a risk of collapse due to excessive debt — a forecast that proved to be prescient of the massive home foreclosures, bank failures and collapse of the credit markets that led to the global economic crisis of 2008.
“Consumer-fueled growth worked for a while and provided a lot of stimulus for the economy,” Fazzari said, “but the middle-class American is tapped out now; they’ve borrowed as much as they can. They’re cutting back because they have no choice. I don’t know how we can get a strong recovery at this point.”
Economist Glenn MacDonald, Ph.D., the John M. Olin Distinguished Professor of Economics & Strategy and director of the Center for Research in Economics and Strategy at Olin Business School, is more optimistic about the recovery.
His forecast calls for a slow and steady rebound from what he calls a “typical modern” recession.”The economy bottomed at the end of the first quarter of this year, and, as would be typical of modern recessions, it was not especially deep and will bounce out relatively slowly,” MacDonald said. “That’s been the case in post-1980s recessions.”
MacDonald said comparatively high unemployment eventually will decline, but it will take time. “Employment tends to come back with a nine-month to one-year lag. So, there is no particular reason to think this recession is going to be any different from others that have occurred in the modern era.”
Unlike Fazzari, who believes more government stimulus funds could help the economy, MacDonald is concerned that the stimulus package may prolong the recession.
“Because the government has no source of resources other than taxes or borrowing, the ‘stimulus’ merely creates the prospect of a lot of uncertainty about both the national debt and higher taxes,” MacDonald said. “This uncertainty may hinder the recovery.”
MacDonald offers advice to people who are concerned about the economy. “Stick with the data, look at the facts, and keep your eye on where this machine (the U.S. economy) is going,” MacDonald said, “and that really offers a lot of optimism.”