While markets are celebrating the imminent return to positive US economic growth, the composition of that growth is critical to its sustainability. US economic fragility predates the credit crisis, which in fact was simply a dramatic symptom of the underlying structural stresses. Over the past decade, the US economy has generated no net new jobs (and in gross terms healthcare and government have been the biggest job generators), while the contribution of capital investment to GDP growth has been the lowest since the 1930's. Put another way, the productive capacity of the US economy has been severely impaired as excess consumption funded by ever growing leverage has squeezed out long-term investment in public infrastructure and corporate fixed assets.
That same debt accumulation has postponed the impact on living standards of stagnant real median household incomes, and low labor rate participation (so that almost 17% of the potential workforce is now unemployed or underemployed on BLS statistics). Without the capacity (or indeed appetite) to expand an already crushing debt burden, and with clear evidence in recent data of higher-earning US households using discretionary income to pay down borrowings, the medium term trend for US consumption is distinctly negative. The charts below track the long-term trends in total US consumption (private and public) and fixed asset investment, highlighting the remarkable divergence of both from trend since 2000.
For the US, the balance of payments deficit is necessarily identical to the degree by which US domestic investment exceeds its domestic savings. But this deficit has not been cut in 2009 by US savings rising towards its investment level but US by investment collapsing downwards towards a saving level which has itself fallen further. These trends are confirmed by the revised 2nd quarter 2009 GDP data. This decline in investment is shown in Figure 1, which charts US total fixed investment, both private and government. As can be seen US fixed investment in the second quarter of 2009 declined to the lowest level since World War II at 14.7% of GDP.
I've discussed the appalling levels of public and private investment in US physical infrastructure previously, at less than a fifth of European levels and a tiny fraction of (admittedly excessive) Chinese levels, but the investment 'deficit' is chronic across the wider economy and a trendline through the chart above would be clearly downward sloping. The more recent brutal fall in investment will have seriously negative consequences for the US economy. Cyclically, the fall in investment is a major factor depressing GDP (and will be naturally reversed to some extent in an upturn) but the historically weak trend in fixed investment growth over the past decade suggests is will prove difficult for the US to sustainably grow productivity and thus real employee earnings. Investment is ultimately the most important factor input into economic long-term growth, and the anaemic levels of recent years will alone substantially reduce the trend US growth rate.
A consequence of the investment decline is that the proportion of US GDP devoted to consumption has actually risen under the impact of the financial crisis. It's widely observed that US consumption has been falling since the crisis began, and saving rising, but that confuses a rise in household saving, (which certainly has occurred) with total US savings, which have actually declined further under the impact of the growing budget deficit. The unsustainable debt accumulation in the private sector has simply been replaced with an offsetting increase in public sector debt, which has delayed an inevitable downward adjustment in average living standards as consumption spending is finally diverted to investment. Overall, leverage in the whole economy is still growing at at nearly $4 of aggregate debt for every dollar of national income, it points to a solvency crisis over the next few years. The trigger for that crisis of confidence in America's ability (and willingness) to repay its debts may well prove to be the erosion of the dollar's reserve status, so perhaps those Chinese apparatchiks should be careful what they wish for.
