US Economy Ready to Heat Up

Later this week the Bureau of Economic Analysis will report that the US economy wrapped up its 5th consecutive year of GDP growth. Since the average post-war expansion has lasted 5 years, it may feel like the current expansion is getting long in the tooth. However, rather than looking for a recession, I am of the view that the economy is on the verge of accelerating.

US GDP

The chart above shows that although the economy has expanded in recent years, growth has been below average due to household deleveraging. But there are indications that US households are beginning to borrow again. First, the household debt to disposable income ratio has returned to the lowest levels of the previous decade. And the stronger balance sheet has allowed household liabilities to increase again.

US Debt

When consumers increase borrowing, they are also increasing spending. Since personal consumption makes up two-thirds of the US economy, faster consumer spending can spark faster GDP growth.

In addition to consumption, residential investment is an important driver of economic growth. As I detailed in a recent post, housing starts are set to pick up which can be a tailwind for the economy.

Residential Investment as a % of GDP

In sum, I am expecting consumer spending and housing to help push US GDP growth to 3%+ for the next couple of years.

 

 

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