Why The Market's Six Week Slide Is A Massive Threat To The US Consumer Recovery

For the past 6-weeks, the Dow has been down, and while that may change today, recently losses are going to have an impact on the U.S. consumer.

That’s because the recovery in U.S. consumer balance sheets has been led by the rise in equity prices. While home prices aren’t recovering, balance sheets for consumers are improving on a Brodeur basis.

From Deutsche Bank’s Joe LaVorgna:

To be sure, the decline in household buying power is of some concern to us. We had thought an improving labour market would at least stabilise home prices, but that has not happened to this point. However, we must highlight the fact that even the large drop in household buying power in 2008 did not preclude a small recovery in consumer spending in 2009, when buying power still fell but by a relatively modest -$111 billion. There is little doubt we would be more worried about the consumer spending outlook if the ratio of household liquid assets to liabilities, a complementary measure to household buying power, were not on the rise. Indeed, this metric bottomed in Q1 2009 and began rising thereafter, nullifying some of the effects of declining buying power.

That figure has been on the rise largely because of stock prices.

From Deutsche Bank’s Joe LaVorgna:

While household liabilities declined -$74 billion in Q1, the ninth decline in the last 10 quarters, the ratio improved because of rising liquid assets—they advanced by +$863 billion. This was due mainly to surging stock prices; the value of household equity holdings was up $885 billion in the quarter. There is little doubt that higher stock prices are integral to the economic outlook, essentially making our forecast of above trend GDP growth in some sense contingent upon financial market developments.

This is important to note. In a sense, a declining stock market could be a signal of the future U.S. economic outlook and whether or not that second half bounce back everyone seems to be calling comes to pass.

If stock prices keep falling, or if they don’t gain some ground on what they’ve lost, then consumer spending may dip in H2 2011.


Photo: Deutsche Bank

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