Thursday, June 16, 2011

Goldman's Hatzius: US's Household Debt Slowdown

And we Jan Hatzius from Goldman Sachs analyzes the american Flow of Funds report.
Nothing really new, but the re-acceleration of household deleveraging.

He cites this fact as one of the reasons why we're seeing a slow down in the US that goes beyond Japanese-supply-chain-disruption.

Goldman Sachs Research
US Daily: Deleveraging Continues in Early 2011 Print Friendly

Published 05:40 PM Tue Jun 14 2011
Jan Hatzius

The Fed's flow of funds report for the first quarter shows continued deleveraging in the US economy. The broadest measure of debt owed by the nonfinancial sectors -- which includes the borrowings of private households, nonfinancial businesses, and all levels of government -- grew just 2.3% (annualized) in the first quarter. As shown in the first chart below, this was the third-slowest pace on record; only the second half of 2009 was lower.

One key reason for this weakness was the continued paydown of household debt. In the first quarter, nominal household liabilities declined by 2.0% (annualized), the twelfth consecutive quarter of debt paydown, as shown in the second chart below. This has taken the ratio of household debt to disposable income down to 114%, from a peak of 130% in 2007.

The implications of the ongoing deleveraging process for the economy are double-edged. On the one hand, it partly explains the weakness of US economic activity in 2011 so far. The US private sector is still running a financial surplus of 6.3% of GDP, which means that the level of spending remains unusually far below the level of income. At a time when real income growth has been restrained by the sharp increase in energy prices, this has depressed the growth pace of spending.

On the other hand, the deleveraging suggests that households have continued to repair their balance sheets and are thereby increasing their ability to spend in the future. The Federal Reserve Board publishes quarterly data for the household debt service burden, defined as interest payments plus scheduled principal repayments as a share of disposable income. Although figures for the first quarter will not be available until later this week, the fourth quarter of 2010 showed a drop in the debt service burden to 11.8%, the lowest since 1998 and down from a peak of 14% in 2007.

The decline in the debt service burden is translating into an improvement in household credit quality. According to the New York Fed, newly delinquent loans to households in the first quarter fell to $250 billion or 2.2% of total household debt outstanding, down from a peak of $405 billion or 3.3% of total household debt outstanding in the fourth quarter of 2008. In turn, improved credit quality is translating into a greater willingness of banks to make loans to consumers. The Fed's quarterly Senior Loan Officers' survey showed that the net share of banks indicating greater willingness to make consumer installment loans rose to 28.8% in the second quarter, the highest reading since 1994.

Over time, these improvements should feed into a pickup in household spending growth. Eventually, households will find that they have cut their debt stock sufficiently. At that point, spending should increase relative to household income. In turn, this should feed into stronger aggregate demand for good and services, as well as positive multiplier effects in the labor market that again feed back into stronger income growth. The recent data suggest that this is a slow process, but we continue to believe that it will ultimately result in a stronger US economy.

Jan Hatzius

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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