The medium-term outlook for the U.S. economy will hinge largely on how much farther the deleveraging cycle has to run.
T he good news for U.S. households is that the most intense phase of the deleveraging cycle is over. The bad news is that hopes that the deleveraging cycle will come to an end within the next couple of years are unduly optimistic.
Housing debt, which accounts for four-fifths of all household debt, currently stands at about 60% of the value of the residential housing stock, still well above the pre-bubble level of 40%. Also, the pace of public sector deleveraging is likely to intensify, especially at the federal level. Moreover, the paradox of thrift continues to reign supreme: the current household saving rate is still below what one would expect given the present ratio of household net worth-to-disposable income. This means households will continue to try to save more, which will likely only serve to depress spending and aggregate incomes.
Adding to the trouble is the fact that labor compensation as a share of GDP has sunk to a post-war low. Indeed, for all the talk about how U.S. consumers have been living beyond their means, the reality is that even during the housing boom, personal consumption as a share of GDP excluding healthcare expenditures was below where it was in the 1950s.
Bottom line: While household deleveraging will be less of a drag going forward, economic growth likely will stay subdued for the foreseeable future.
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