Comstock Partners, Inc.March 15, 2012
The Underestimated Drag Of Household Deleveraging
Household debt deleveraging is only at its beginning stages and has a long way to go. It has already placed a lid on consumer spending that is holding down economic growth, and will continue to do so for the next few years. To convey how heavy a burden this debt is on the economy we present the following data.
Household debt has averaged 55% of GDP for the last 60 years and climbed to about 65% by 2000, when it really took off and soared to 99% at the peak in 2008. Since that time it has dropped to 86%. Although this is commendable progress, it has been the main reason why the current recovery has been by far the slowest since the 1930s. Furthermore, in order to get the debt down to even the relatively elevated 65% level of 2000, it would be necessary for debt to decline by about $3.2 trillion. When we consider that this is a whopping 30% of current personal consumer expenditures, the enormity of the task becomes obvious. Now we don't expect this to happen all at once, and the rise in GDP over coming years will also reduce the ratio. Therefore the drag on spending won't be as disastrous as the $3.2 trillion implies but will still be a serious impediment to future economic growth.
A similar analysis applies when household debt is measured against consumer disposable income (DPI). The ratio of debt to DPI averaged 76% over 60 years and increased to about 92% by the end of 1999. It climbed to 130% at the pre-crisis peak and has since dropped back to 113%. In order for the ratio to get back only to the year-end 1999 level, debt would have to decline by $2.4 trillion, or 22% of consumer spending.
Is all of this relevant to the real world? You bet it is. Fourth quarter GDP was up only 1.6% over a year earlier, while real consumer expenditures were down 1.4% year-over-year in January 2012. And despite all the talk about an improving economy, it is year-over year consumer expenditure growth that is the leading indicator for production, employment and capital spending.
When we also consider that the EU (in total the largest economy in the world) is probably entering a recession, and that a major bank is saying that China is already in a hard landing, the outlook for the U.S. is highly questionable. This is not being discounted by the current exuberance in the stock market