Study Shows Personal Debt Continues to Drag Down Economy
Another study shows that personal debt continues to weigh down consumers and the economy. Incomes are stagnant, home values haven’t recovered, unemployment is high, and consumers are paying down debt and not spending. These will not improve anytime soon, according to new research about the status of the U.S. consumer from Blackrock, Inc.
According to the Blackrock study:
* Households are dealing with the same amount of debt while drawing on only one income. Thus, many households have seen not only a deterioration in their ability to service debt, but also find themselves in a situation of heightened perceived risk of leverage, as single income households are more vulnerable to unfavorable employment dynamics. This trend of decline in the number of dual income households will likely take time to reverse.
* Roughly 70% of the GDP is still driven by personal consumption activity. Growth from the consumer sector will be determined by a shift in real incomes, credit availability and a less leveraged consumer.
* Tightening in consumer credit markets will force U.S. consumers to keep consumption growth roughly in line with income growth and to slowly reduce their current level of leverage.
* During this time of unemployment and underemployment, don’t look for a near-to-mid-term rebound in consumer spending. The bulk of the deleveraging process remains ahead of the American consumer, regardless of the income measure used.
* The portion of households supported by only one income has steadily increased. This is social trend that has clearly had implications for U.S. consumer debt and puts these households in a heightened perceived risk of the inability to pay down debt.
* The total amount of loss in real household wealth from 2006 to 2010 was $12.4 trillion, 70% of which was due to home equity destruction from the 2006 market peak.
* U.S. debt-to-income ratio was close to 154% in Q4 2010, and deleveraging accomplished since the pre-recession peak was closer to 7.5 percentage points. Judging from an historical perspective, neither one of these outcomes looks particularly positive, nor are they likely to correct very quickly.
* The study says that resurrecting higher levels of consumer spending will need sustained and genuine improvement to the labor market, real disposable income growth, and a reduction in the already low savings rate. Until these conditions are fulfilled, it is very difficult to see how the U.S. consumer can return to anything like prior spending levels, which has vitally important implications for the household sector’s ability to spur more rapid economic growth.
* In future years, it is more likely that secular tightening in consumer credit markets will force U.S. consumers to keep consumption growth roughly in line with income growth and to slowly reduce their current level of leverage.
Link to BlackRock study: