DEMISE OF US CONSUMER EXAGGERATED'
Reports of the demise of the United States consumer have been exaggerated.
Households were reducing their debts and building savings faster than he anticipated, said Mr. Richard Berner, co-head of global economics for Morgan Stanley in New York, giving them more room to spend in the future.
Berner, who was quoted in a Bloomberg report from New York on Tuesday, said, 'The deleveraging timetable is nearly a year ahead of schedule.'
Debt payments as a share of disposable income fell to 12.46 per cent in the first quarter from a peak of 13.96 per cent in 2008 and are about in line with the 12.09 per cent average of the last 30 years, based on Federal Reserve data.
Berner sees the ratio falling to what he considers a sustainable range of 11 per cent to 12 per cent by year-end.
This improvement will help the US economy avoid a relapse into recession and put it on course for three per cent growth next year, he said. The economy grew 1.6 per cent in the second quarter.
Not everyone is so sanguine, chief economist at Gluskin Sheff & Associates in Toronto, Mr. David Rosenberg said in a September 3 interview with Tom Keene on Bloomberg Radio.
He noted that the US faced 'an extremely anaemic economy for some time to come' as households retrench and 'work off these debt excesses.'
US economic growth will slow to 2.5 per cent next year from a projected 2.7 per cent this year as unemployment above nine per cent tempers consumer spending, according to the median forecast of 59 economists surveyed by Bloomberg News this month.
While consumers do need to save more and borrow less, they are making headway in putting their finances into better shape, said Vice-Chairman of BlackRock Incorporated in New York, Mr. Robert Doll.
'I do not think enough credit has been given to that. The US consumer is not dead,' he said.
This should be good for retail stocks, Doll said. The SPDR S&P Retail ETF, an exchange-traded fund covering retail shares including consumer-electronics chain Best Buy Company in Richfield, Minnesota, and New York-based Tiffany & Company, has outperformed the SPDR S&P 500 ETF Trust, which tracks the Standard & Poor's 500 Index, since August 3. it rose by 2.4 per cent compared with a decline of 0.7 per cent, after trailing the S&P in June and July.
The bond market won't fare as well, according to Berner. He sees the yield on the Treasury's 10-year note rising to four per cent or more by late 2011 as household spending and the economy strengthen. The yield stood at 2.79 per cent on September 10 in New York, according to BGCantor Market Data.
Retail sales excluding automobiles probably rose 0.3 per cent in August after increasing 0.2 per cent in July, based on the median forecast of 62 economists surveyed by Bloomberg. The Commerce Department in Washington is scheduled to release the figures on Tuesday.
How far along Americans are in balancing their books depends on which measure of financial health is most important. Optimists such as Doll focus on flows — the percentage of every dollar 'coming in the front door' in the form of wages and other income that 'goes out the back door' to service debt — and highlight the progress households have made.
Rosenberg concentrates more on the stock, or amount, of debt remaining and argues that consumers will take years to work it off. The ratio of household debt to income stood at 119 per cent in the first quarter, according to Fed data. While that's down from a peak of 129 per cent in 2007, it's still above the 30-year average of 90 per cent.
Berner and Rosenberg were among the first Wall Street economists to call the recession that began in December 2007. Rosenberg, who was then North America economist.