Has Consumer Deleveraging Ended?
NEW YORK (
) -- 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.
Reality Inflation
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.
Clearly, recent bond market reactions justify such a conclusion.
Nevertheless, this can't be good for a consumer still struggling with job quality (the U.6 Unemployment Rate rose to 14.3% in June from 13.8% in May) and income rising more slowly than the reality of inflation. If the cost of debt service rises significantly, the ability to take on new debt will be severely impacted.
Conclusion
Just as in the purchase of a home, where the most important factor in the lending decision is the monthly payment/income ratio, the apparent "pause" in the consumer leverage downtrend may simply be a function of the historically low level of rates and the resulting low monthly cost of debt service.
The recent reaction to "tapering" in the fixed-income markets with the rapid back-up in interest rates may bode ill for the consumer's debt service ability and the near term U.S. economic growth rate.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Robert Barone is a partner, economist and portfolio manager at
, an investment advisory firm in Reno, NV.
He previously held positions as an economist for Cleveland Trust Company and as professor of finance at the University of Nevada. During his tenure at Comstock Bancorp in 1996 he became a Director of the Federal Home Loan Bank of San Francisco, serving as its Chair in 2004.
Barone also served as Director of AAA of Northern California, Nevada and Utah and a Director of its associated insurance company. He currently serves on AAA's Finance and Investment Committee. Along with his son Joshua, he founded Adagio Trust Company in 2000. Barone received a Ph.D. in Economics from Georgetown University.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.