Household deleveraging poses near term risks to consumer spending

- "Household deleveraging has been progressing at a substantial pace. The question is how much further it has to go, and the answer to this question is crucial to the outlook for GDP growth."
- "Progress on the debt side of the household balance sheet has been impressive. We estimate that the debt/income ratio has fallen from a peak of 136% of income in 2008 to less than 120% currently, and at the current rate of personal saving and loan defaults is on track to fall to near 100% by the end of next year. This implies that the household debt service ratio will fall below the range it has been in for several decades."
- "Movements in the saving rate, the key link between the household balance sheet and consumer spending growth, depend not just on debt and debt service, but also on the asset side of the balance sheet, or more specifically on movements in wealth--the gap between assets and debt. Household assets are up from their crisis lows thanks to the bounce in the stock market, though they have taken a hit in the middle of 2010 and remain far below their pre-crisis peak."
- "The key issue is how much more households will feel the need to adjust their saving rate up (and accelerate debt declines for a while longer) in reaction to the large net loss in wealth that has occurred over the past several years. We tested a wide range of specifications of the causal relationship between wealth and saving, and we find that households appear to respond to a three-year moving average of their wealth to income ratio relative to a longer term wealth goal that is best defined as a 20-year moving average of the wealth to income ratio."
- "Given current expected trends in household assets and debt, this relationship sees the saving rate rising further, into the 7-1/2 to 8% range by late 2011, after which it begins to recede slowly. The implication is that consumer spending will continue to be a significant drag on growth through next year, after which it will become a modest engine of growth (consumer spending growing faster than income). This finding reinforces the notion that the Fed will be on hold at least through 2011."

DeutscheBank Global Economic Perspectives 20100908

No comments:

Post a Comment