Household Deleveraging Poses Near-Term Risks for the US Economy

The US economy is struggling with sluggish growth, and Deutsche Bank's Chief US Economist, Peter Hooper, attributes this underperformance to households' cautious spending behavior. According to Hooper, the key factor is that households have been deleveraging, reducing their debt levels, and this process is critical in determining consumer spending. As households have about a third of their total assets in housing, softening housing prices could hinder their ability to spend on big-ticket items. This, in turn, poses near-term risks for the US economy.

Key Takeaways:

• Household deleveraging is a significant factor in the US economy's underperformance, as households have been reducing their debt levels and this process is critical in determining consumer spending.
• Households' cautious spending behavior is attributed to the record drop in their wealth due to a decline in both stocks and home prices.
• The pace of deleveraging has been increasing over time, and it could increase further, making it a drag on consumer spending.
• Bank of America suspending home foreclosures in all 50 states does not help the process, and the slowing of this process means it will stretch out over time, potentially leading to a longer period of weakness in home prices.
• Dr. Hooper expects the US to be in a long-term downtrend in the dollar as part of the shift towards an external surplus in the US, reducing the deficit.
• The US economy's recovery will depend on its ability to shift the composition of output from domestic demand to exports, which will be done through changes in relative prices and a drop in the dollar.
• The 2008 financial crisis led to a significant drop in the dollar, and a similar drop is possible in the future if the US economy does not respond quickly to monetary expansion.
• The holiday season is unlikely to see a booming consumer spending, partly due to consumer caution resulting from ongoing deleveraging.
• A broadly modest improvement in retail sales is expected, but it is still far from a consumer-led recovery.

Statistics:

• Households have about a third of their total assets in housing, making housing a critical factor in their spending behavior.
• The average household has seen a record drop in wealth due to a decline in both stocks and home prices.
• The pace of deleveraging has been increasing over time, with the saving rate shifting up and showing no signs of slowing down.
• Households have been deleveraging for around 2 years, but the rate of deleveraging has accelerated in the past year.
• The US economy's recovery will require a significant reduction in the deficit, which will be achieved through a decrease in domestic demand and an increase in exports.

Sources:

• Tom Keene, Host, Bloomberg Surveillance
• Peter Hooper, Chief US Economist, Deutsche Bank Securities Inc.
• Ken Prewitt, Host, Bloomberg Surveillance
• Alan Greenspan, Former Chairman of the Federal Reserve
• Thomas Mayer, Chief Economist, Deutsche Bank
• Bloomberg LP (Copyright 2010)
• Roll Call (Copyright 2010)