The American consumer is making progress in its fight against debt, but another economic shock would damage the consumer’s gains and endanger America’s retail recovery, according to Societe Generale’s Aneta Markowska.
Thus far, the U.S. consumer has made significant progress in terms of deleveraging, and financial assets have been reflated by the Fed’s QE2 program, according to Markowska.
But the misconception right now is that it’s how much debt people have that drives consumer spending. Rather, according to Markowska, it is the savings rate. Right now, that savings rate is at 5-6%, but another shock could be about to change that, and inhibit consumer spending.
In the years prior to the credit boom, the savings rate averaged between 7%-8%. Those are also levels consistent with current wealth ratios. Yet, the savings rate has clearly stabilised in the 5%-6% range, where it has been for the past 18 months. It therefore appears that another shock will be needed to push it higher. We believe that the trigger could ultimately come from higher real interest rates, perhaps induced by repricing of US sovereign risks. We view the low Treasury yields as both a cause and effect of the global imbalances and the insatiable appetite for Treasury debt by foreign buyers. It is our strong belief that re-balancing – or reduced buying of US public debt by foreigners – will necessarily involve higher Treasury yields. However, this adjustment may still be a few years off.
Notably, Markowska points out that we’ve already been through one shock in this economic cycle, rising gas prices. She says we were able to avoid significant effects there because of the increase in the savings rate, which allowed consumers to shift spending away from discretionary items, to gas. But a dramatic movement in interest rates could trigger a higher savings rate, and a reduction in consumer spending.
Thus the debate over the debt ceiling remains front and centre in terms of the U.S. economy. If progress isn’t made, and interest rates on U.S. government bonds are re-priced higher, that results could damage U.S. consumers.
Note our progress thus far in deleveraging. Also, debt service as a per cent of disposable personal income, which would rise in the event of higher interest rates.
Photo: Societe Generale
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