Savannah Chamber

8 2 tighter credit for new apartment development, and the rising proportion of households opting for home ownership. Sub-par productivity growth – albeit higher than in 2018 – is another factor that will hold down GDP and personal income growth. Sub-par productivity growth reflects many factors; (1) the aging of the U.S. population, (2) low levels of business investment, (3) less foreign immigration – especially restrictions on the movement of highly trained people to the U.S., (4) the plethora of regulations at every level of government, (5) the repercussions of many years of mediocre gains in educational achievement, (6) the lagged effects of underinvestment in the nation's major research universities, and (7) tariffs as well as other restrictions on foreign trade. Consumer Spending Personal consumption expenditures will grow by about 2 percent in 2019, which is slower than in 2014-2018. Continuing, albeit slower, job creation will ensure that the economy continues to operate past full employment, prompting faster wage and salary growth as well as gains in hours worked. The job gains – reinforced by higher pay and low interest rates – will bolster household balance sheets. Improved labor and housing market conditions gives consumers the confidence to spend on new and existing homes, but stock market volatility reduces consumers' confidence in the economic situation. The net effect is lower confidence in 2019. Growth of disposable personal income will give consumers the wherewithal to spend, but less confident households will opt to save slightly more of their income in 2019. Credit will be available to households, but not much more so than in 2018. Credit also will be more expensive. Wealth-effect spending will be either much smaller or entirely absent in 2019. Due to strong labor market conditions, credit markets will to continue to expand. Traditional lenders will continue to loosen lending for home mortgages, but will tighten lending for automobile loans due to rising default rates. Many households have already locked in historically low mortgage rates, which will discourage refinancing activity. Nonetheless, consumers will take on more home equity debt. The proportion homeowners who extract cash from the refinancing of their home mortgages will rise. Credit card debt will expand faster in 2019 than in 2018 as lenders continue to push into market segments with lower credit scores. Finance-technology startups will rapidly expand subprime lending to customers with poor credit ratings. Credit card default rates therefore will continue to rise. Lenders will probably begin to tighten lending for bankcard credit in late 2019 or early 2020. One reason why consumer spending will grow is that household finances have improved. Going into the Great Recession, household finances were in terrible shape. U.S. consumers were heavily indebted and very short on savings. Indeed, by almost any measure households were extremely overextended. For example, the household debt service ratio – debt payments divided by after-tax income – stood at an all-time high of nearly 14% in 2005-2008. If you add in other financial obligations, such as automobile lease payments, rental payments on tenant-occupied property, homeowner's insurance, and property tax payments, you get a financial obligation ratio that was nearly 19 percent. That was also an all-time high. A very depressed household savings rate also reflected consumers' largess. The household savings rate fell to the lowest levels experienced since the Great Depression. Essentially, households opted to boost current spending by extracting more and more wealth from their homes – this, of course, was facilitated by lax credit standards. The house became the ATM. As households shifted their priorities from spending to savings, the personal savings rate rose from its cyclical trough of only 2 percent in mid-2005 to 12 percent in early 2012. Due to wealth gains, excellent labor market conditions, and high levels of consumer confidence, the savings rate declined to about 7 percent in 2016 and held relatively steady through 2018. The end of stock market gains and less confidence will cause consumers to save a slightly higher proportion of their income in 2019. The savings rate will rise to about 8 percent. This modest increase in the s avings rate will be a weak headwind to consumer spending and in turn to U.S. GDP growth. Over the long term, most households will find that even an 8 percent savings rate will not be adequate to maintain current living standards in retirement, especially if returns on financial assets remain below historical norms. The household savings rate therefore needs to rise to 9 or 10 percent. That is quite attainable – a 9 percent savings rate prevailed from 1961- 1990. The bottom line is that a rising savings rate will restrain, but not stop the growth in consumer spending in 2019. The restoration of the discipline of saving represents an overdue return to normalcy that helped households unwind imbalances that developed in their balance sheets prior to the Great Recession. For example, the household financial obligation ratio was 239 basis points lower in early 2018 than in late 2007. In fact, the 2018 household financial obligation ratio is lower than the levels that prevailed in the early-1980s and the early-1990s. The lower financial obligation – or debt service – not only inspires confidence, but it also allows households to more easily service their debt. This protracted period of household deleveraging was painful, but it was also necessary. The statistics show

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