Anaemic Recovery: The US Housing Market and the Consumer

With the exception of the initially clear signs of western world recovery from the ‘great recession’, it has since become increasingly fragile. With subpar growth, the US economy is vulnerable to external shocks, such as the euro area debt crisis or the slowdown of China and the other developing countries. Such adverse shocks may derail the recovery and return the economy to recession. But even in the absence of adverse external shocks subpar growth makes it difficult to dent unemployment and ultimately bring it back to the pre-crisis levels. With elevated unemployment the ‘feel-good’ factor, which is so important for a buoyant recovery, is absent and the general feeling is that the recession is still here. An ‘anaemic’ recovery, to use the phrase introduced by Allan Greenspan after the recession in the 1990s, has been a feature of the last three business cycles, which span a twenty-year period. All three recoveries are due to imbalances in various sectors of the economy. In the early 1990s and early 2000s cycles, the feeble recovery was due to corporate sector imbalances. But in terms of the ‘great recession’, the weakness of the recovery is due to imbalances in the personal and banking sectors. In this chapter we analyse the causes of the current recovery by concentrating on the interaction of the housing market and consumer expenditure.