Here are two impressions of the state of the American Consumer, that 300-million-wallet juggernaut that makes up nearly 70 percent of the economy.


Impression One: We're down, but not out. Consumers base their spending decisions on three factors -- wealth, employment expectations, and credit. In the good times, our houses and the stock market made us wealthy, jobs were plentiful, and credit was loose. In the bad times, home values are going down, the job market is frozen, and credit is still tight. But picture one is a vision of long-term optimism. The stock market is coming back, home values will eventually stabilize and consumers will start reaching into their back pockets soon enough.

Impression Two: We're down, and we're not getting up. In 2009, the American household entered the recession with debt equal to 145 percent of yearly income. The shock of the debt crisis has instilled a kind of Pavlovian mistrust of credit and spending that has changed the character of the American consumer. When wealth and credit come back, it won't matter. We're psychologically scarred from spending like we did before the recession.

Noam Scheiber explains what we should expect if the second impression is the most accurate:
Early last year, economists at the San Francisco Fed observed that, if you extrapolate from the Japanese experience, the deleveraging process would take about a decade, during which time the saving rate would rise to about 10 percent, subtracting about half a percentage point from GDP growth each year (a huge amount when GDP is only growing by 2-3 percent).** Slightly less alarmingly, the economist Allen Sinai has constructed an index of household financial conditions based on the measures of leverage we're talking about. Sinai says the index recorded its all-time worst reading in early 2009 and estimates it'll take another two or three years to get back to a level that's healthy by historical standards.

Read the full story at TNR.

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