The lasting effects of the current inflation
They say one should never bet against the US consumer and given how much interest rates have increased so far it is amazing to see how consumption in Europe falters while Americans just continue as if nothing happened. But the American experience of 2023 seems to be the exception that proves the rule.
Ulrike Malmendier is an economic hero of mine because she single-handedly published about half a dozen of my all-time favourite studies. The one that made her name (and that of her co-author Stefan Nagel) was the famous Depression Babies study that showed that people who lived through the Great Depression as children were influenced by these experiences for the rest of their lives, even in old age.
But these traumatic memories extend not just to the Great Depression. Some studies show the long-term impact of the high inflation in the 1970s had a lasting impact and more are coming. Ulrike Malmendier will soon publish another study that looked at the personal experience of unemployment rates during the financial crisis. In there, she shows that people who lived through the recession of 2008/2009 in the US had lower consumption several years later in 2013. The chart below shows that people who lived in Pennsylvania where unemployment rates rose less than in Florida reduced their consumption in 2013 by less. Meanwhile, people in Florida who had a lifetime experience of higher unemployment rates reduced their consumption more than people with a more benign lifetime experience in the labour market.
Unemployment rates in the 2009 recession and impact on consumption in 2013
Source: Malmendier and Shen (2023). Note: Bars indicate state unemployment rates, and lines indicate changes in personal consumption expenditures.
So far, unemployment rates have not changed significantly in the current inflationary episode. But as unemployment rates rise, the combined effect of a cost-of-living crisis and rising unemployment will likely scar consumer behaviour for years. And the worse the labour market gets, the bigger the scars will be. This means that Europe will be more scarred than the US, once again providing more resiliency to US consumers in future recessions. But even if US consumers remain more resilient, it seems clear to me that we are unlikely to see the same kind of consumer frenzy in the 2020s that we have seen in the 2010s, let alone the 2000s.
Regional unemployment rates in the US
Source: Liberum, Bloomberg
It is of interest, but no surprise. Our respective ‘world views’ are formed by our experiences - mainly during formative years - say 11 to 21.
b.1951 I had parents who lived harder lives but who escaped from hardship. My mother was accepted for a scholarship to London University at age 18, but her (foster) parents stopped it: “You will just be married when you reach 21yo”, married women being regarded as brainless dependants. As such she encouraged me to learn from young age onwards. For that I remain grateful. My father could not relate (he never went to school) but was supportive. The state funded all my tuition fees and a maintenance grant of £360 p.a. I was so much more fortunate than young people today (“Nicholas is having a gap year before Oxford”; “Mary works in a care home 50 hours a week for minimum wage looking after Nicholas’s grandparents”.)
My views decades on? Stop deceiving young people with ‘Micky Mouse’ degrees and re-create shorter vocational courses; all funded by the state (we pay it back many times in higher taxes on higher earnings); in popular culture value work, saving & self betterment, community and family. Individualism, relativism & loss of basic morality are a disaster. Social media are the work of the devil. Recognise climate change and deal with it (see Jeremy Grantham, also of my era) and stop the hypocritical playing with promotion of EVs etc. Elect a government with the vision & commitment of 1945-51. [Rant over, but there is substance there].
The implications of the research are that UK & USA in the 2050s will reflect the mores of today. I have greater faith in young people, but our current society does not help them - Will that lead them to react against it? I hope so for their sake.
Great article JK.
Americans learned from 2007/2008 not to trust floating rate debt.
About ~40% of US homeowners are mortgage free. For those that have a mortgage, the median mortgage rate is 3.5% (with 95% of mortgages under 5%). The benefits of having 30yr fixed debt!
The 2nd largest expense (auto) is also fixed debt which helps too.