Everyone is wondering when the lifeblood of the American economy, the consumer, is going to stop saving and paying debts, and start spending again.
In a recent note, Deutsche Bank shared some thoughts on this pressing question, gathered from Q2 data in the Federal Reserve’s Flow of Funds Report. They looked at debt as a percentaged of nominal GDP and found that the two sectors of the economy most damaged by the recession, housing and financials, seem to be in the middle of their debt cycle. Together, they’ve paid of $3.8 trillion of debt since Q4 2008.
In other words, we’re not out of the woods yet and we still have more deleveraging to do. But the end is, at least according to Deutsche, in sight.
See, right now household and financial debt comprises about 180% of nominal GDP (that’s the lowest level since Q1 2004). From Q2 1991 to Q2 2011 household debt alone averaged around 77% of nominal GDP. That’s where we want to get. The question is when can we get there?
If we assume that this average pace of deleveraging continues and we apply our current forecast of 4.5-5.0% nominal GDP growth going forward, the household debt/GDP ratio would reach the 20-year average sometime in the second half of 2013. Similarly, we if we apply the same analysis to the financial sector, which has been shedding debt on average by 2.0% per quarter, this sector can reach its 20-year average ratio of approximately 80% by the back half of 2012. This is interesting because as the chart below shows, changes in financial sector debt lead that of the household sector by one quarter.
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