A Black Hole

Consumption accounts for over 70% of U.S. spending. During the 1950s, our household savings rate ran roughly 8% of our disposable income. In the decadent years from 2002 to 2007 by contrast, that rate averaged only 2.7%. Will American consumers pick up where they left off two years ago, or 50 years ago? Assume the answer is somewhere in the middle.An increase of five percentage points of savings would leave the economy with a $545 billion gap to fill.

This is just a portion of the hole. The U.S. housebuilding industry has left another hole. Residential investment in the second quarter of 2009 was 56% below its peak. The industry will not (and should not) return to its pre-financial meltdown size when it accounted for 6.1% of GDP. But if homebuilding recovers about half of the ground it has lost since then, it will be about $216 billion below its peak.

Adding the two components of the hole - our spending is about $760 billion short of the amount required to return the economy to full employment. If no other source of spending takes over to fill the hole, then sales will stagnate, employment will fail to recover, and household incomes will falter. Tax revenue and local public sector spending will also remain flat or decline.

A Black Hole.