For about six quarters we have watched various measures of strong United States economic performance: Corporate profits have been very strong. The Dow has almost doubled since the early 2009 bottom of about 6,600. Productivity has been strong. During 2010 quarter 4, consumption grew 4 percent, significantly above the 3.4 percent post-war average, and consumption expenditures’ share of GDP is at the all-time high of 71 percent.

At the same time we have had other measures of economic performance that have been dismal. The housing market is one high-profile example. Most other real estate categories are as weak as the housing sector. Banking is hardly better, with 365 closures since the crises began and 13 closures in April this year alone, which is a recent monthly high. Bank chargeoffs continue to maintain the blistering pace of over $40 billion a quarter. The labor market has been horrible, with weak job gains and high unemployment levels. Finally, household debt levels are still too high.

To some extent I can reconcile these differences. The positive results have been driven mostly by larger and corporate company results. The negative results are mostly a reflection that small companies have not been able to grow since early 2008. We understand the gap between large and small businesses has widened. This is due to increased regulation and tighter credit markets, which hurt small businesses much more than large corporations.

However, to another extent I am confused. I had hypothesized in 2009 that households would rebuild their balance sheets to pare down debt. However, this has not happened. This particular aspect of the economy is hard to forecast and has significant implications. It can be boiled down to this: will the household sector savings rate be maintained at a high enough rate to bring their debt levels down or not? This leads to an economic policy question: should Federal economic policy add the goal of incentivizing household savings?