The U.S. economy posted a stunning drop of 0.1 percent in the fourth quarter, defying expectations for slow growth and possibly providing incentive for more Federal Reserve stimulus.
The economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles.
There are plenty of “feel good” statements running around this morning though, assuring us that consumer spending and housing are going to pull us out and we’ll have a great 2013. Laura Tyson, is a former chair of the US President’s Council of Economic Advisers, and is a professor at the Haas School of Business at the University of California, Berkeley. Tyson, while warning of downside risks, also maintained an optimistic tone. She did, however, warn:
Large losses in household wealth, deleveraging from unsustainable debt, weak wage growth, and a decline in labor’s share of national income to a historic low have combined to constrain consumption growth. Real median household income is still nearly 7% below its 2007 peak, real median household net worth dropped by 35% between 2005 and 2010 (and remains significantly below its pre-recession peak), and about 90% of the income gains during the recovery have gone to the top 1%.
To be sure, the balance-sheet headwinds holding back consumption have eased. Households have slashed their debt – often through painful foreclosures and bankruptcies – and their debt relative to income has sunk to its 2005 level, significantly below its 2008 peak. Helped by low interest rates, debt service relative to household income has fallen back to levels not seen since the early 1980’s. But consumption will be hit by the expiration of the payroll tax cut, which will reduce household income by about $125 billion this year.
It’s hard for me to believe that in spite of all of that, a significant number of Americans will be able to see enough profit in their current home to consider upsizing, or believe their economic situation allows them to jump into the market. As ZeroHedge pointed out this morning though, economists keep having trouble predicting the future because people’s behavior is irrational. Perhaps it will be in 2013 as well.