Photo: REUTERS/Edgar Su
The big economic news was yesterday’s blazing hot retail sales number for February.
It crushed expectations, and shook off any suggestion that the end of the Payroll Tax Holiday was hurting the recovery.
Over at the Daily Beast, Daniel Gross had a funny take that the American shopper as the real hero of the day, bravely going into Costcos and Ambercrombie & Fitch stores.
Why is the shopper going so strong?
It comes down to three charts.
The first is one that Henry Blodget posted this morning. Debt service costs relative to disposable incomes are finally back to multi-decade lows. Finally, debt isn’t so much of a burden.
This has led to an even more important phenomenon.
The great debt deleveraging is coming to an end.
Last week the Fed released Q4 “Flow Of Funds” data, which reveals the assets and liabilities of American households and corporations.
This chart from Dan Greenhaus at BTIG shows that the pace of contraction in mortgage debt is slowing dramatically. In fact, on a sequential basis, mortgage debt is about to rise.
The defining characterization of the latest bust was the sharp and basically unprecedented collapse in debt. The end of this trend is a huge boost to the economy.
Dan Greenhaus told Business Insider:
“The process of reducing debt burdens, particularly so by the consumer, has been a major impediment to economic growth. If this process is closer to the end than the beginning, which almost surely is the case, then holding all else constant, the bias for consumption going forward is to the upside. By extension, the bias for the overall economy has to be to the upside as well.”
Not everyone agrees that the deleveraging is totally over, but actually it’s just the trend that counts.
Goldman’s top economist Jan Hatzius told Business Insider:
“My view is that the private sector deleveraging is not yet over, as I think that private debt/income will still decline further. However, I think the pace of deleveraging is slowing; that implies a reduction in the private sector financial surplus, and an increase in spending relative to income; and that in turn means a positive impulse to growth. However, I think that growth for most of this year will still be subdued as the government is moving in the other direction. Next year should be more clearly positive, as fiscal retrenchment slows sharply but the private sector impulse remains strongly positive.”
The end of the deleveraging — or at least the declining pace of deleveraging — means that consumers are ready to spend again. And they have a lot of catching up to do.
As this chart from Dan Greenhaus shows, consumer spending since the beginning of this recovery has been incredibly subdued compared to other recoveries.
Photo: Dan Greenhaus, BTIG
With the end of deleveraging, just the return to normal shopping habits is a big boost.
Bottom line: Debt payments relative to income are basically back in line with history. That means that credit is finally ready to start expanding again. And the American consumer has a lot of catching up to do.
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