An article today titled ‘Business Outlook: Why Consumer Spending Won’t Drive a Recovery’ says in its sub-title “(U.S.) Households are paying down debt and rebuilding their nest eggs, so they’re not spending. Still, that’s unlikely to thwart a modest economic upturn”.  The article says:

•    wealth losses since early 2007 totaling $13.9 trillion Q1 2009, and in April U.S. consumers saved 5.7% of their earnings, the most in 14 years.

•    (U.S. consumer) liabilities have declined to 131.1% of after-tax income in Q1 from 138.6% in Q4 2007, in circumstances where based on 1990’s trends the ratio would be about 110% implying U.S. households still have about $2.2 trillion in excessive debt they need to eliminate;

•    households have been deleveraging for more than a year, and the saving rate may be close to topping out resulting in a conclusion that ongoing deleveraging is unlikely to prevent at least a modest upturn in the economy Q3 and Q4 2009;

•    (U.S. consumer) wealth losses seem likely to slow as well, with household net worth—assets minus liabilities—falling $1.3 trillion in Q1, 50% of the average 2008 quarterly decline;

•    given the stock market rebound in Q2, economists at UBS estimate net worth is on track to increase by some $3 trillion this quarter, the first gain in two years;

•    plunging U.S. household wealth is the chief reason households are saving more of their income, and if the decline in net worth is bottoming then the increase in the saving rate may be about over, too. The ratio of wealth to income, which tends to track the saving rate, is now about where it was in the mid-1990s, when the rate was about 5%;

•    (U.S.) consumer spending has stabilized this year despite the ongoing realignment in household finances; and,

•    much will depend on the labor markets. The slower they heal, the more drawn out the process will be, and the less (U.S.) consumers will be able to contribute to the recovery.

From my perspective this article sets out a lot of facts and surmises that don’t gel to a conclusion that ‘Consumer Spending Won’t Drive a Recovery’.  First, Q2 isn’t yet over and I see no assurance that, depending on statistics released over the next few months that  U.S. and world equity markets will hold the gains made in Q2 to date over the next several months.  Second, I believe – and have been repeatedly saying on this blog – that job loss and gain statistics are the principal ‘go-forward driver’ of U.S. consumer spending.  Deleveraging ultimately ought to look after itself, but if the total amount of U.S. consumer spending dollars derived from employment income continues to drop so too must the total number of dollars spend by U.S. consumers.  I would not be taking the headline or what I see as the optimism reflected in this article ‘to the bank’, but suggest you read it in its entirety by clicking here.

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