Consumer Deleveraging: Prolonging the Pain
Real, sustained growth unlikely before 2011.
Yesterday afternoon, the Federal Reserve released its February consumer credit data. Consumer credit outstanding fell by a greater than expected 3.5% annualized rate in February, with revolving credit falling at a 9.7% annual rate. Non-revolving credit eked out a 0.2% annualized advance.
This is a direct manifestation of the consumers' intent to improve his or her balance sheet by deleveraging. In turn, this is also a direct reflection of the bludgeoning of the household sector's financial net worth, owing to falling stock prices and eroding home valuations. Drawing upon the Federal Reserve flow of funds figures, it is my estimate that the household sector's net worth has fallen nearly $19 trillion from mid-2007 through yesterday's market close.
The consumer is thus motivated to save, not to spend. When you put that nearly $19 trilliuon erosion of financial net worth in perspective, it dwarfs the several $1 trillion efforts, whether it's expansion of the Fed's balance sheet, the Obama stimulus package, TARP, the PPIP, etc. Remember the consumer is roundly 70% of the economy.
The pronounced sluggishness of consumer income "growth" and the woeful conditions in the labor markets encourage consumer caution. It is the household sector's need to deleverage that will lean against the stimulus package, and cause the recession/depression to last longer and be deeper that the consensus or government prognosticators maintain.
While we may see an interim statistical bounce in a real GDP context in the second half of this year, I believe a pattern of sustained real growth won't begin in earnest until the first quarter of 2011, or the final quarter of 2010.
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