Neel Kashkari of PIMCO offers a sobering take on the modestly good news about the U.S. economy:

When will we know that the U.S. economy has really cured its underlying disease of relying too much on household debt to artificially drive its growth? We will know it when overall consumption dollars continue to climb while the unemployment rate falls, the savings rate remains high and consumption as a percentage of GDP stays flat (or even falls).

Increased consumption spending fueled by more Americans working (and saving) is a good thing and should be a goal of policymakers. Consumption fueled by temporary stimulative policies or reduced savings is just a nasal decongestant. It makes the headline economic data look better, but doesn’t move us closer to actually healing our economy.

In light of the recent enthusiasm about the U.S. auto industry, Kashkaris offers the following corrective:

Just as there is no reason to assume household debt levels will continue to climb, there is also no reason to assume companies that benefitted from that debt-fueled spending will grow at historical rates. The U.S. auto sector is a good example: The current recovery in auto sales is both a combination of replacement demand and increased loan availability. But if the American consumer is secularly impaired (or perhaps liberated from the weight of ever-increasing debt), total car ownership per household could decline in the long run, limiting the scope for a rebound. Resuming peak sales in the 18 million units range will likely take a long time, driven by population growth rather than household debt.

I found Kashkari’s analysis lucid and sensible. I’d be interested in reading his prescriptions.