Something’s changed in how the economy works. One theory is “deleveraging”: Americans paying down their high debt. The economy won’t accelerate until this process is complete, the argument goes; the fact that debt-service ratios have dropped to early-1990s levels is considered a good omen. Another approach is to examine the economy by sectors and see which ones are lagging compared with past recoveries. Yellen did this and indicted housing (its deep slump) and state and local governments (spending cuts). Again, there are said to be encouraging signs. Home construction, prices and sales are up; state and local spending is stabilizing.
This analysis helps but, I think, misses the main story. To overgeneralize slightly: We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending. The inclination was to surrender to immediate gratification. Want a new car? Sure, why not. More meals out? Great idea! Businesses behaved similarly. Banks made the next loan; companies hired the next worker and approved the next investment project. An ever-expanding economy justified optimism, and optimism supported an ever-expanding economy. Hello, bubble.
The psychology has now reversed. The bias is against extra spending. Eat out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom years, the personal saving rate (saving as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent. It could go higher, imposing a further drag on the economy. Businesses have also retreated. They resist approving the next loan, job hire or investment. Since 1959, business investment in factories, offices and equipment has averaged 11 percent of the economy (gross domestic product) and peaked at nearly 13 percent. It’s now a shade over 10 percent, reports economist Nigel Gault of IHS Global Insight.