The American consumer’s readiness to kick the economy into high gear comes down to a question of who’s right: Yale’s Stephen Roach or Harvard’s Martin Feldstein.
To Roach, Americans are still working to rebuild savings and will be slow to increase spending as long as wage growth is sluggish and household debt exceeds long-run averages. “We have a long, long way to go,” says Roach, 68, a senior fellow at Yale University’s Jackson Institute of Global Affairs in New Haven, Connecticut, and former chairman for Morgan Stanley Asia.
Over at Harvard University in Cambridge, Massachusetts, Feldstein, 74, predicts “we finally are going to see a good year in 2014,” thanks to stock-market and home-price gains that have boosted household wealth and given consumers the confidence to spend.
Which view proves true will have a lot to do with whether consumer spending, which constitutes about 70 percent of the U.S. economy, makes this the break-out year for the expansion. Consumption gained momentum in 2013, and more vigor this year could spur still-hesitant businesses to hire and invest, augmenting growth.
“After saying year after year that the Fed and others have been too optimistic,” Feldstein says he thinks this year will be different. The former economic adviser to President Ronald Reagan and former chairman of the Council of Economic Advisers commented in a Jan. 13 Bloomberg television interview.
Feldstein’s Camp
Feldstein has more economists on his side, a Bloomberg survey this month shows. Consumer spending will grow 2.6 percent this year and 2.8 percent in 2015 following a projected 2 percent gain last year, according to the median forecast of economists in the survey. That would make 2014 and 2015 the strongest years since 2006.
Feldstein and those who agree with him, including Goldman Sachs Group Inc. Chief Economist Jan Hatzius, cite gains in household net worth, which stood at $77.3 trillion on Sept. 30, $8.2 trillion more than its pre-recession peak. Wealth fell almost 20 percent during the recession that started in December 2007, and didn’t recover the lost ground until the third quarter of 2012.
Contributing to the gains: The Standard and Poor’s 500 Index last year posted its biggest annual advance since 1997. Home prices in 20 U.S. cities climbed 13.6 percent in October 2013 from a year earlier, the biggest increase in more than seven years, S&P/Case-Shiller data show.
Debt Easing