"Lord make me chaste, but not yet," St. Augustine once said. And so it might be said that the U.S. economy is experiencing an Augustinian recovery. We know what we want: lower deficits, lower consumer debt, and radically reformed housing policy -- but not yet. For now, Washington lawmakers want higher spending from governments and individuals and stability in the housing sector, which has resumed its downward slide in the last month.
With consumer spending, the picture is especially cloudy. In April, consumer credit fell for the 17th month in two years, the longest period of deleveraging in U.S. recorded history (that's 67 years). One the one hand, it is good and necessary to re-build balance sheets to get future consumption on stable footing. On the other hand, repairing balance sheets by paying down debt means that paychecks and stimulus cash we want to flow back into the economy just aren't, and that's keeping consumption (67% of the US economy) in a cage. From the WSJ:
The Fed's quarterly "flow of funds" report, due out on Thursday, is likely to show the household sector's debt level, which includes both consumer credit and mortgage loans, remained at about 20% of total assets in the first quarter.
In the mid-1990s that ratio was around 15%, compared with a peak in the first quarter of 2009 of about 22.5%. Just getting debt down to 18% would require households to shed an additional $1.4 trillion of debt.
Despite Friday's disappointing jobs report, there are good things happening in the economy. Corporate profits are up, which bodes well for future hires. The trouble in Europe could lower long-term interest rates and make it easier for families to finance home purchases. Retail has had a nice 2010. But if Americans are going to continue spending their paychecks and tax cuts on paying off debt, it will be a while before the economy reaches a stable consumer-driven recovery.