The bad news? That put US consumers approximately where they were just prior to the financial crisis.
70% of the US economy is driven by consumer spending. When the incomes of those consumers have been flat for 30 years and as many as 16% are unemployed, that means the nation's economic engine simply can not rev itself into recovery mode.
The degree of household indebtedness means that consumers are likely to be cautious for the foreseeable future. Which also means that business will not invest its growing cash hoard because it can see no increase in sales and therefore no 'acceptable' return. Which will, of course, mean that income growth and job creation will remain stalled. And so on. In situations like this government usually takes the lead by stimulating the economy through public works projects and related spending. For political reasons having do with the determination by some to see President Obama defeated for reelection, that sort of stimulus has been proscribed this year.
The US consumer's situation has not become more desperate than it is because they are the recipients of the largest wealth transfer in human history. That being the bequest they have and are receiving as their parents, the savers and scrimpers of the Depression generation, die off. But with that debt dragging like a large anchor on a small boat, there will be no movement without some sort of break in the stimulus impasse. JL
Karina Frayter reports in USA Today:
Consumer spending, once the driving force of the U.S. economy, is likely to remain stagnant for years as households struggle to cut debt and build up savings, economists say.
According to a recent study from the BlackRock Investment Institute, the ratio of household debt to personal income (wages and salaries only) remains at a staggering 154%, which is only 7.5 percentage points lower than in pre-recession peak.
While some progress in consumer debt reduction has been made, the heavy lifting of meaningful deleveraging still lies ahead," says the study.
Until consumers repair their balance sheets, they are unlikely to increase spending or take on any new debt even with interest rates close to zero percent.
That could continue to hamper the recovery since consumer demand makes up more than 70% of the U.S. economy.
The latest data from the Labor Department shows that consumer spending fell 2% last year, following a 2.8% decline in 2009.
Persistently high unemployment, stagnant wages, high commodity prices and overall stock market volatility are slowing the deleveraging process.
Some experts say the U.S. faces some similar risks as Japan during its so-called "lost decades." Japan's economic crisis of the 1990s, caused by the bursting of a nationwide asset bubble, was followed by massive consumer deleveraging and lackluster spending in the 2000s.
"Private sector continues, just as in Japan, to desire a lower level of debt," says Scott Mather, head of global bond portfolio management at Pimco.
On a positive note, he expects deleveraging of the private sector in the U.S. to happen faster than in Japan, where it lasted 15 years. "Our real estate bubble was not as big as Japan's, and we don't have deflation expectations embedded in the economy," Mather told CNBC.
Homeowners, who are underwater on their mortgages, have an even harder time resolving their debt levels. Some economists see home prices falling even further.
To fully unwind the bubble, home prices need to fall another 20%, says Joshua Shapiro, chief economist at MFR Securities. "As home prices decline further, there will be continued impetus for household deleveraging in order to offset the effect of lower home prices and probably lower equity values on balance sheets," he says.
Some experts argue that the government needs to help speed up the deleveraging process.
"The key is to reduce the debt problem. Banks need to be induced to write down the principles on mortgages and give households debt relief so they can resume spending," says Stijn van Nieuwerburgh, associate professor of finance at NYU Stern Business School.
Some economists say more stimulus spending to keep economic activity from falling, so that households have revenue to repair their balance sheets.
But Mather says more government spending could potentially be counterproductive. "As government takes on more debt, consumers may start saving even more as they anticipate higher taxes ahead."
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