Anatomy of the U.S. Economy

by: Richard A. Anderson

When the calendar turned from March 31st to April 1st, the U.S. economic expansion turned 117 months old. Should the expansion continue through July, it would become the longest economic expansion in U.S. history. Given that the U.S. economic expansion is starting to show signs of its age, many have been questioning how much longer until the next recession.

The strength of the U.S. economy is typically viewed through the lens of gross domestic product, or GDP. GDP is the total value of all goods and services produced in a country over a specified period of time. The most recently released data showed U.S. GDP grew 2.2% in the fourth quarter of 2018, which signaled a slowdown from the third quarter of 2018. However, GDP grew 2.9% in calendar year 2018, which was an increase from the 2.2% growth in 2017.

The consensus expectation among economists is that U.S. growth will continue to slow this year. But a slowing economy is different from a recession. A recession is generally defined as two consecutive quarters of negative gross domestic product (GDP) growth.

The suspects named in the investigation as to what could cause the next recession are numerous. I’ll attempt to boil it down to a few of the more popular opinions: the Fed, trade policy, growing U.S. trade deficit, and political dysfunction.

What these opinions seem to ignore is the math behind how GDP is calculated.

The formula to calculate the components of GDP is GDP = Consumption + Investment + Government Spending + Net Exports. As you can see from the chart below, consumption is by far the largest component of U.S. GDP.

04152019_Components of GDP.png

Given the influence of consumption on U.S. GDP, it’s important to understand the strength of the consumer balance sheet in order to gauge the future direction of the economy.

When the Federal Reserve Bank of New York released its Q4 2018 Quarterly Report on Household Debt and Credit, the numbers were astounding. Aggregate household debt balances increased for the 18th consecutive quarter, and now stands at $13.54 trillion. Total household debt is $869 billion higher than the previous peak of $12.68 trillion in Q3 2008 and is $2.39 trillion higher than the trough of $11.15 trillion in Q2 2013.

04152019_Total Household Debt.png

Strictly looking at the household debt numbers, it would appear debt levels have gotten out of control. However, what this fails to take into account is that while household borrowing has increased, household assets have increased at a faster pace. So, the debt as a percentage of assets has actually declined over the past few years and is at a healthy level.

The following charts are a good way of putting the debt levels in perspective.

04152019_Household Balance Sheet.png
04152019_Debt Service Payments.png
04152019_Personal Savings Rate.png
04152019_Delinquency Status.png

While the overall level of household debt may appear alarming, U.S. consumers are better positioned to handle this debt. They have a greater base of assets and a higher net worth, meaning their debt to asset level is lower than in previous periods. Plus, they have higher income with which to repay their debt and better savings habits. This is reflected in the fact that debt delinquency has remained stable.

While any one number or data point should not be used to pass judgment, viewing all these data points in aggregate shows the U.S. consumer balance sheet is strong, despite growing levels of consumer debt. The strength of the U.S. consumer is one reason we believe the U.S. economic expansion still has room to run.