Reports of the demise of the U.S. consumer have been exaggerated.
Households are reducing their debts and building savings faster than he anticipated, said Richard Berner, co-head of global economics for Morgan Stanley in New York, giving them more room to spend in the future.
“The deleveraging timetable is nearly a year ahead of schedule,” he said.
Debt payments as a share of disposable income fell to 12.46 percent in the first quarter from a peak of 13.96 percent in 2008 and are about in line with the 12.09 percent average of the last 30 years, based on Federal Reserve data. Berner sees the ratio falling to what he considers a sustainable range of 11 percent to 12 percent by year-end. This improvement will help the U.S. economy avoid a relapse into recession and put it on course for 3 percent growth next year, he said. The economy grew 1.6 percent in the second quarter.
Not everyone is so sanguine. David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, said in a Sept. 3 interview with Tom Keene on Bloomberg Radio that the U.S. faces “an extremely anemic economy for some time to come” as households retrench and “work off these debt excesses.”
U.S. economic growth will slow to 2.5 percent next year from a projected 2.7 percent this year as unemployment above 9 percent tempers consumer spending, according to the median forecast of 59 economists surveyed by Bloomberg News this month.
While consumers do need to save more and borrow less, they are making headway in putting their finances into better shape, said Robert Doll, vice chairman of BlackRock Inc. in New York. “I don’t think enough credit has been given to that,” he said. “The U.S. consumer is not dead.”
This should be good for retail stocks, Doll said. The SPDR S&P Retail ETF, an exchange-traded fund covering retail shares including consumer-electronics chain Best Buy Co. in Richfield, Minnesota, and New York-based Tiffany & Co., has outperformed the SPDR S&P 500 ETF Trust, which tracks the Standard & Poor’s 500 Index, since Aug. 3 -- rising 2.4 percent compared with a decline of 0.7 percent -- after trailing the S&P in June and July.
The bond market won’t fare as well, according to Berner. He sees the yield on the Treasury’s 10-year note rising to 4 percent or more by late 2011 as household spending and the economy strengthen. The yield stood at 2.79 percent at 4:13 p.m. on Sept. 10 in New York, according to BGCantor Market Data.
Retail sales excluding automobiles probably rose 0.3 percent in August after increasing 0.2 percent in July, based on the median forecast of 62 economists surveyed by Bloomberg. The Commerce Department in Washington is scheduled to release the figures on Sept. 14.
How far along Americans are in balancing their books depends on which measure of financial health is most important. Optimists such as Doll focus on flows -- the percentage of every dollar “coming in the front door” in the form of wages and other income that “goes out the back door” to service debt -- and highlight the progress households have made.
Rosenberg concentrates more on the stock, or amount, of debt remaining and argues that consumers will take years to work it off. The ratio of household debt to income stood at 119 percent in the first quarter, according to Fed data. While that’s down from a peak of 129 percent in 2007, it’s still above the 30-year average of 90 percent.
Call the Recession
Berner and Rosenberg were among the first Wall Street economists to call the recession that began in December 2007. Rosenberg, who was then North America economist for Merrill Lynch & Co. in New York, forecast a 2008 economic contraction in November 2007. Berner made a similar forecast the following month.
Rosenberg was overly pessimistic after the recovery began in the middle of 2009, telling Bloomberg Radio on July 23 of that year the economy might “relapse” into contraction in the 2009 fourth quarter. It instead grew by 5 percent. Meanwhile, the economy’s recent weakness has forced Berner to lower his forecast for growth in the second half of this year by 1 percentage point, to a range of 2 percent to 2.5 percent, in an Aug. 27 research report.
The progress households make in fixing their financial positions will play a key role in determining the outlook for consumer spending, Fed Chairman Ben S. Bernanke said in an Aug. 27 speech at Jackson Hole, Wyoming.
He took some encouragement from recent revisions to economic data that showed Americans socked away more in savings than originally estimated. The Commerce Department reported on July 30 that the savings rate was 5.9 percent in 2009, up from a previous report of 4.2 percent. The rate has averaged 5.8 percent through the first seven months of this year.
The revision “implies greater progress in the repair of household balance sheets,” Bernanke told a Kansas City Fed conference in Jackson Hole. “Stronger balance sheets should, in turn, allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves.”
The savings rate so far this year is above the 5.2 percent level of 1995, before the run-up and subsequent relapse in the stock and housing markets, leading James Glassman, a senior economist at JPMorgan Chase & Co., to conclude that deleveraging is nearly complete.
“The consumer has already done a lot of the heavy lifting,” the New York-based Glassman said. “I don’t think there is all that much balance-sheet drag ahead.”
Aggregate consumer debt has fallen for seven straight quarters to $11.7 trillion as of June 30, 6.5 percent below its peak in 2008, the New York Fed said in an Aug. 17 report. Total household delinquencies declined in the second quarter for the first time since 2006, dropping to 11.4 percent of outstanding debt from 11.9 percent in the first quarter.
“Credit quality is improving very rapidly,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania.
U.S. credit-card write-offs fell below 10 percent in July for the first time since April 2009, Moody’s Investors Service said on Aug. 25. Write-offs for loans deemed uncollectible dropped to 9.3 percent from 10.3 percent in June.
The top six U.S. credit-card issuers -- including JPMorgan Chase and Citigroup Inc. in New York and Charlotte, North Carolina-based Bank of America Corp. -- all reported lower write-offs and delinquencies for July in regulatory filings last month.
Retailers such as Nordstrom Inc. that issue their own cards are also benefiting.
“We continue to see improving credit metrics,” Michael G. Koppel, executive vice president and chief financial officer of the Seattle-based department-store chain, told analysts in an Aug. 12 conference call. “Our delinquency rate at the end of the second quarter was 3.5%, down from 4.2% at the end of the first quarter of 2010 and 3.6% at the end of the second quarter of last year.”
Households are “far along” in their efforts to bring their finances into better balance, Zandi said. He expects deleveraging to last about another year before it’s complete.
History suggests, however, that the U.S. may face another seven years of subpar growth as consumers reduce the debt they built up prior to the recession, said Carmen Reinhart, a professor at the University of Maryland in College Park who presented a paper on the topic at Jackson Hole.
In the advanced economies, if “you look at the decade after the financial crises and compare that to the decade before the financial crises, growth is about 1 percentage point lower,” she said in an Aug. 27 Bloomberg Television interview.
Consumption may grow by an average of about 2 percent a year in the next three to five years as households slowly reduce their debts and rebuild their savings, said Allen Sinai, chief global economist at Decision Economics in New York.
Consumer spending has risen at a 3 percent average annual rate during the last 30 years and accounted for 70.8 percent of gross domestic product in the first quarter.
BlackRock’s Doll focuses on the progress households have made.
“I’m not claiming the U.S. consumer has all its problems solved, but it’s heading in the right direction,” he said. “Talk of the U.S. consumer being in dire straits was too negative.”