Consumers, Wisely, Show Some Restraint

NEW YORK (TheStreet) -- Three consecutive quarters of economic growth. Gradual improvement in the labor market. And while financial markets have been turbulent, economic activity has been only modestly affected. I have been arguing for some time a recovery would take hold this year -- and that clearly is the case, and then some.

Growth is still on pace to be stronger than anticipated, fundamentals have improved and the lift from unprecedented fiscal and monetary policy support has finally kicked in.

So let's celebrate the recovery and be prepared for a second half of mostly good news for the economy and, hopefully, some recovery in equity prices.

The celebration is likely to be a bit subdued, but that could prove to be a positive thing -- especially if the restraint is being driven by consumers.

The pace of the recovery will be affected by a number of factors: the next phase of deleveraging by households; how the Federal Reserve executes an exit strategy; and the playing out of the fiscal debacle in Washington and state capitals.

The primary issue in the near term will be centered on how consumers continue down the path of deleveraging and restoring their personal balance sheets. Millions of households have been turned upside down after a decade of debt accumulation followed by the worst downturn in seven decades.

Now consumers are figuring out how to pay down debt and get back on solid ground. In terms of consumer deleveraging, we should not kid ourselves about the magnitude of the change required.

Debt is still more than 61% of gross domestic product, net worth is still down 17% from its peak and savings rates required to support future obligations need to more than double from current levels. This is before we adjust for the massive underfunding occurring in Washington and state capitals -- underfunding that will eventually have to be addressed.

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