Courtesy of Michael Panzner of Financial Armageddon
In "The Dope Gap," I highlighted the almost surreal divergence between a measure of consumer sentiment and a benchmark index of companies that depend on the consumer. Of course, my opinion doesn’t matter much to all these smart-money types who are betting that financially beleaguered Americans are poised to open their wallets in a big way. However, I wonder if a new paper, "From Keeping Up with the Joneses to Keeping Above Water: The Status of the US Consumer," from the BlackRock Investment Institute, a research arm of the world’s largest money manager, might convince them to see the error of their ways (or, at the least, to stop taking so many mind-altering chemicals before investing)? [italics mine]
The stresses visited on the typical US consumer over the past few years have been tremendous, and while policy actions appear to have stabilized the economy and set it on a path of slow recovery, the pace of healing, in labor markets and the housing sectors in particular, is arduous for many. Just under one quarter of outstanding mortgage loans borrowers, numbering more than 11 million homeowners, exhibit negative equity in their homes. Beyond the sizable housing inventory on the market, approximately 2.2 million mortgage loans are grinding their way through the foreclosure process, and nearly two-thirds of these mortgage-holders have not made payment in at least a year. Moreover, the data makes clear that the less equity a homeowner holds in the property, the higher the likelihood of “strategic default,” or essentially the decision to improperly abrogate payment on the debt obligation, regardless of the ability to pay. Add to these stresses the high levels of unemployment and underemployment, the need for households to continue the deleveraging process, as well as the limitations (perceived or real) of the effectiveness of policy responses, and recent equity market volatility, and this cocktail does not argue for a near-to-mid-term rebound in consumer spending.
If long-term leverage sustainability is assumed to reside near 1990 levels, then the bulk of the deleveraging process remains ahead of the American consumer, regardless of the income measure used. In the past expansion, consumer spending growth was able to outpace income growth because of the wealth effect created by the housing boom, which increased the collateral value upon which consumers could lever, fueling a coincident expansion of credit. In our view, however, the era of abundant consumer credit has ended, at least for the time being. In future years, it is more likely that secular tightening in consumer credit markets will force US consumers to keep consumption growth roughly in line with income growth and to slowly reduce their current level of leverage.
We think that these trends, coupled with stubbornly high unemployment, higher commodities prices, and slower growth in wages and salaries, will likely contribute to a lower level of personal consumption growth over the next few years. Moreover, since consumer spending is a key component of the GDP growth rate, this would argue for generalized economic growth levels that are, at best, modest for years to come, and may in fact appear anemic when compared to pre-crisis growth rates.
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