I just got back from a small bank conference and just about every banker was saying the same thing (for the first time in several years): non-performing loans are dropping significantly; borrowers look much stronger this year as compared to last year; they’re more optimistic; they’re hiring and drawing down credit lines for the first time in several years, etc. So, for the first time in quite some time most of the bankers were cautiously optimistic.
I’d say there’s little doubt that the economy’s improving, albeit at a very modest clip. The question is whether or not it’s sustainable. The problem, of course, is all of that debt out there.
Everyone – except perhaps the corporate sector – has too much debt; that is, mainly consumers and Uncle Sam. But… debt SERVICE is actually about in the middle of historical range… because of historically low interest rates. Which is why the economy is growing (very modestly) despite the mountain of debt.
Note the debt service ratios (they’re a complete non-event… for now):
So, the logical person queries, “Well, what happens when and if interest rates increase?” The simple answer is that debt service will increase (despite the fact that a pretty large chunk of the total debt is at low fixed rates with long maturities), which will crimp spending, and the economy will slow and possibly go into recession… and rates will come down again (eventually). So, there is a see-saw effect between debt, the servicing thereof, and economic growth. Unfortunately, it doesn’t work as smoothly in reality as it does in theory. We could have stagflation for a few years or a number of other unpleasantries while the see-saw seeks a new equilibrium.
The point, however, is that over the LONG term… we’re likely to muddle along at half (or less) the growth rate of the recent past as the debt gets paid down, or is just stabilized while the economy (slowly) catches up to it. I’d bet on 1%-1.5% real GDP growth over the next 15-20 years (versus 3%+ over the last 60 years). That’s not the end of the world, but it’s going to be unpleasant for a lot of folks for an extended period of time. I suspect we’re going to see a continuation of some recent trends like a declining birth rate and people “simplifying” their lives (fewer mcmansions, smaller cars, less bauble-buying). The money, after all, just ain’t there. (It never was “really” there, of course, but now more people realize it.)
