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2010 Economic Forecast: Slow Growth with Chance of Stagnation

25.11.2009
Positive third quarter economic statistics have been greeted with cheers and proclamations that the "Great Recession" is over, but economist Steve Fazzari 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" according to Fazzari. "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 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 says. "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.* The research shows how consumer spending was accompanied by a dramatic rise in household indebtedness. Credit cards were maxed out and real estate assets leveraged to extreme levels. Fazzari posits in the paper that household debt is not only a source of growth for the economy but also a risk of collapse. A conclusion 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.

*"Household Debt in the Consumer Age—Source of Growth and Risk of Collapse," Capitalism and Society (BE Press), volume 3, 1-30, 2008 (with Barry Cynamon).

Melody Walker | Newswise Science News
Further information:
http://www.wustl.edu

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