The U.S. economic recovery has been slow. The economy grew just 1.9 per cent in the first quarter and is expected to show little improvement.
But in a new note Deutsche Bank chief economist Joseph LaVorgna writes “there has been some fundamental improvement in household balance sheets that may be getting short shrift by investors.”
He points to the ratio of household liquid assets to liabilities which has increased to 2.11 in the first quarter of 2012, from 1.99 in the fourth quarter of 2011, as a positive sign. The is the highest reading since Q1 2002.
This ratio measures the health of consumers by looking at their aggregate balance sheet. And the quarterly increase has been the biggest in over a decade.
But does this mean households are spending more?
This morning Gluskin Sheff economist David Rosenberg wrote that the savings rate is climbing as policy uncertainty continues and the job outlook remains clouded. And personal consumption expenditure is expected to “barely come in much better than a 1% annual rate. That is stall speed.”
70 per cent of retailers missed their sales target in June, demand for retail space is weak, and the vacancy rate at strip centres has barely improved wrote Rosenberg. In fact the industries that are thriving are the “do it yourselfers” like repair shops and dollar chains.
So, it would appear that U.S. consumers are antsy even if household balance sheets are improving.
However, there may be a silver lining. LaVorgna explains that the higher stock prices and lower liabilities are behind the improved ratio of household liquid assets to liabilities. And with stock prices effectively flat in the second quarter, another drop in household liabilities should push up the ratio.
“This is undoubtedly good news for the longer-term outlook for consumer spending,” writes LaVorgna.