Improving Household Finances To Boost Consumer
BMI View: We expect US household finances to continue to improve over the medium term, supporting an uptick in consumer activity. A dwindling debt burden, improving consumer sentiment, and higher net worth will support an increase in real private consumption, driving real GDP growth of 2.1% this year and 2.7% in 2014 .
We believe that an improvement in household balance sheets - in terms of both liabilities and assets - will support increased consumer activity over the medium term. We believe that this trend, combined with a tightening labour market ( see our online service, May 7, 'Jobs Creation To Pick Up' ), will allow for real private consumption growth to accelerate this year and next , further cementing the US economic recovery .
Recently released household debt data from the Federal Reserve Bank of New York show that US household debt has fallen to 70.1% of GDP in Q113 from 90.2% of GDP in Q408. Moreover, with the exception of auto loans, mortgage, credit card, and home equity line of credit debt continues to fall ( see chart, below). The deleveraging has been particularly pronounced in credit card debt, which fell to US$660bn in the first quarter of the year, the lowest level in a decade. Lower debt levels underscore our expectation of greater spending in the future.
|US - Household Debt, % chg y-o-y|
Indeed, t h is multi-year period of deleveraging , combined with lower interest rates, has led to a significant drop in the percentage of household disposable income dedicated to debt servicing payments, from over 14.1% in Q307 to 10.4% at the end of 2012. This drop , which will allow consumers to spend more on goods and services , has coincided with a period of improving consumer sentiment, and we believe these two factors are critical for an expansion in consumer activity. Furthermore, we expect interest rates to remain low over the medium term, ensuring that debt service payments remain relatively low as a percentage of income.
|Debt Servicing Takes Less Of Income|
|US - Household Debt Servicing Payments, % Of Personal Disposable Income & U. of Michigan Consumer Sentiment Index|
Lower debt levels have seen a corresponding drop in the ratio of outstanding balances to balance limits, implying that much credit capacity remains in the economy. Indeed, the balance-to-limit ratio on credit cards is near 10-year lows, implying that consumers have the ability to increase their purchasing substantially over the short term.
|Balances Low Relative To Limits|
|US - Household Debt Balances-to-Credit Limit Ratio|
F rom as assets point of view, we believe consumers are in as strong a position as they have been in quite some time. The ratio of owners' equity in real estate to GDP has been increasing for several quarters, and US equities are hitting all-time highs. The associated wealth effect will facilitate greater spending over the next several quarters and also reinforce the upward trend in consumer sentiment seen in recent months.
|Rebounding Household Wealth To Facilitate Consumption Uptick|
|US - Dow Jones Industrial Average & Owner Equity|