Has Consumer Deleveraging Ended?
NEW YORK (TheStreet) -- The quarter ended with a lot of uncertainty.
In the U.S., the uncertainty was centered around when the Fed would begin to "taper" its $85 billion/month of purchases of Treasury debt and mortgage-backed securities.
The markets, beginning in late May, threw a "taper tantrum." Still, despite tax increases and sequestration, the U.S. economy managed to officially grow 1.8% in the first quarter, and likely at a similar rate in the second. That said, four full years after the recession ended, the "recovery" in the U.S. remains fragile and uncertain.
One reason for the fragility is that although corporate profits remain at record levels, household income has continued to struggle. According to Ed Butowsky, founder of Chapwood Investments, while household incomes have risen at a rate at or slightly above the "official" U.S. rate of inflation, the real cost of living rose at double-digit rates in nearly every one of America's 50 largest cities.(Other commentators on inflation, such as John Williams of Shadowstats.com and MIT's Daily Price Indexes project, indicate that true inflation is significantly higher than official U.S. government indicators.)
Has Deleveraging Ended?Yet, despite slowly rising incomes, somehow the American consumer has managed to find enough resources to keep on buying -- lately bigger-ticket items. Some say that consumer deleveraging has ended. But there is evidence that it may only be in a "pause." Recent data from the Federal Reserve Bank of St. Louis show show that the cost of servicing debt, as a percentage of disposable income, is at a modern-day low. So, although the level of debt remains high, as long as rates are at all-time lows, the consumer can still comfortably service that debt. In fact, given all-time low rates, the time may be opportune to take on new debt. This appears to be occurring after several years of abstinence as new car sales and credit card debt are rising significantly. Economic growth in the U.S. is consumer dependent (70% of GDP), and a robustly growing economy means less money-printing and rising interest rates.
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