Financial State of the Nation

Abstract

The objective of this paper is to provide a perspective on the current financial state of the U.S., with the aid of more than two dozen charts depicting key trends. A marked change in U.S. consumer behavior – shifting from a policy of moderate personal savings to a more-heavily consumption-oriented, spending society over the period 1982 through 2007 – is reflected in the personal savings rate. This trend was a factor in Americans “living beyond their means” by acquiring large levels of debt. The personal savings rate and a growing trade deficit over the decade preceding the financial and banking crisis, along with household leverage ratios and growing federal budget deficits, likely represent non-sustainable long-term strategies.

The downturn in this recession was more acute in terms of negative real economic growth, unemployment and housing prices than previous post-World War II recessions. The recovery is being led by business investment and productivity, U.S. exports from the manufacturing sector, and growth in the emerging markets. However, the recovery has been slowing. The traditional drivers of past recoveries – consumer spending and housing – are not playing a dominant role. The dire unemployment picture is likely to be with us for several years.

There is a wide disparity in views among economists as to whether inflation or deflation might ensue. With high unemployment rates, level prices, low consumer demand and spending, and the economy’s struggle to grow, the threat of inflation currently seems far less imminent than the danger of deflation. And fighting deflation is undoubtedly more difficult.

Keywords: economic growth, unemployment rate, housing prices, budget deficits, personal savings rate, deflation, inflation, austerity, stimulus programs, Federal Reserve Bank, fiscal crisis, trade deficits, depreciating dollar, leverage ratios, productivity, China’s holdings of U.S. debt

JEL Classification: E21, E24, E32, E44, E58, E62, H62, I22, J64, P43, P44