PRESENTING: The Invisible Force That’s Saving The US Economy

In talking about markets or economics, we tend to use fairly small numbers. For example, in a given quarter, economists might estimate GDP to come in at 2.5% (a small number), and then everyone freaks out when it only comes in at 2.0% (a difference of just 0.5%, an even smaller number).

But even though the aforementioned numbers are all small, an incredible amount of significance is attached to them: Does this mean businesses or consumers aren’t feeling confident? Does the President need to push for more stimulus? Will the President now lose his job? And so on…

Arguably, we should be using big numbers, though.

Here’s an example.

This chart shows the year-over-year change in Real Personal Consumption Expenditures (basically what households spend on everything, red line) against the University of Michigan Consumer Sentiment data (blue line).


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As you can see, during the crisis, consumer sentiment (the blue line) plunged in a level not seen in decades, while Personal Consumption collapsed at an annualized pace such that the two lines dip by roughly the same amount, and at the same time. In fact, this lines lines up pretty nicely going back a few decades. It’s a neat relationship.

The lesson seems obvious: Sentiment plunges, and spending plunges right along with it.

But now let’s just tweak the chart slightly.


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This is virtually identical, except now the red line (personal consumption) represents the annualized change +100. In other words, a year of -3% growth now represents 97%, or to put it another way, personal consumption in said quarter is 97% of what it was in the quarter one year earlier. In other words, even in the midst of a multi-decade plunge in consumer sentiment, consumer spending came in at 97% of what it was the year earlier.

The point: Sure it’s good to focus on the marginal change, but it’s worth remembering that even in the worst crisis the U.S. has seen in decades, by far the overwhelming majority of the previous year’s economic activity still happened. And it’s not because of confidence or policy or growth or animal spirits or anything. It’s just because most of the economy is people doing normal stuff that they always just have to do.

This fact explains a lot about a U.S. economic recovery that has confounded many people in its resilience.

Here’s another example.

Auto sales fell off a cliff in the crisis, and the entire U.S. automobile industry nearly went kaput.

But since the crisis they’ve bounced back at a pace that has perplexed many.


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Why have auto sales spiked so hard when the consumer is still feeling so much pain, and deleveraging is ongoing?

Maybe this chart will help. It shows car sales divided by the U.S. population. As you can see, we didn’t just plunge, we hit depths like we’ve never seen before in history. And since cars break down, and since people have to replace them just like they always do eventually, car sales had to snap back (and will likely keep doing so).


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What about another key area for the economy (which has also been incredible weak): houses.

This chart from analyst Ivy Zelman, delivered in front of a Senate committee, shows pretty clearly what will drive the next leg up in home building: the creation of new families.

household formation

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While household formation (basically new families setting out to create a home) plunged starting in 2007, the 3-year cumulative number is already on the rise, and not because people are suddenly feeling great about home ownership, but because they’re doing what people have done since the history of time: People get married, make babies, find places to live, etc. It’s not really about the economic cycle at all.

This is another simple, but powerful graph. It just shows the annualized rate of population in growth in Japan and the U.S.


The U.S. certainly isn’t growing like gangbusters, but compared to the pronounced deceleration in Japan, it’s easy to see why the latter has been in such a deflationary funk for so long.

By the way: In 2011, the 1.22 million new Japanese adults were the fewest in history.

So the bottom line is this: The stuff we obsess about: increases in growth, the effect of fiscal policy, the confidence question, etc. all concern the marginal part of the economy.

But most of the economy is what we hardly ever talk about — just people doing the same thing they always do because that’s what the economy is: people living and interacting, getting married, moving in together, having kids, needing more space, having more kids, getting divorced and needing a second place, driving to school or work, eating, going to the doctor and so on and so on.

And all that stuff is pretty powerful, and can drive growth even when on the surface it seems like everything is going to crap.