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US Consumer Comeback: Should We Worry?

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By Peter G Hall *
Vice-President and Chief Economist Export Development Canada

American consumers are happy again - at long last. Good for them - but should we really be ecstatic about this? After all, the last time they were truly happy, it cost the world dearly. It has taken five years to absorb the overconsumption of that episode, and some are convinced we're not done yet. Are we headed for another period of unchecked ebullience, persistent penny-pinching, or can we count on higher yet more sustainable growth?

Most analysts would agree that Americans are nowhere near to unchecked optimism, and that the opposite is true. Data show a reluctant return, one that could perhaps use a flash of 'shop-'til-you-drop' to re-boot things. The world awaits a clear response. After all, this powerful group of consumers still directly accounts for about 14 cents of every dollar that circulates worldwide. International trade can't reclaim its role in global growth without them. What can we expect in the near term?

Peel away the musty rhetoric, and US consumers actually look remarkably well-prepared for a resurgence. First, they are saving a whole lot more than they used to. Unrevised pre-crisis data showed them saving next to nothing. Now, savings rates are just under the 5 per cent level. That may not sound like much, but it has enabled US consumers to get today’s debt-to-income levels down about 25 percentage points from a peak of 163 in 2007. No further adjustment is needed to keep this key ratio falling - it's now on auto-pilot, creating lots of present and future spending capacity.

Second, this improvement is obvious in other debt statistics. Loan delinquency rates mushroomed with the onset of crisis, eliciting predictions of a lost decade, or worse. Five years on, more than half of the rise in delinquency has been erased, and rates continue to fall across almost all categories of loans. At the same time, the household debt service ratio is currently at the lowest level in over four decades. By these measures, Americans have taken deleveraging very seriously, with great results.

Third, US banks see this on their books, and are likely pleased. Their experience with repayments has improved greatly over the past three years, and is quickly returning to pre-crisis levels. This together with the greater comfort arising from beefed-up balance sheets is loosening up lending activity. Senior loan officers in the US are currently more inclined to extend credit than at any point in the past five years. It's a good thing, as renewed lending is a critical element of the resurgence in US auto sales and the ongoing homebuilding boom.

So far, so good. But analysts counter that the spending resurgence - as measured as it currently is - has been fuelled by credit that's as cheap as it ever gets. Their fear is that the impending, inevitable rise in interest rates poses as key a threat to nascent revival as any. Perhaps - but tightening credit conditions almost invariably accompany an economic rebound, and history shows that they rarely abort recovery. Why? Precisely because the aim of tightening is to reduce the stimulus that would cause a reviving economy to overheat. As long as recovery is redeploying excess capacity at a sustainable rate, modest interest rate increases should not be a threat.

Conditions appear ripe for a strong and sustained increase in US consumer spending. Lessons learned in the crisis and post-crisis period won't soon be forgotten, but neither will they prevent this critical engine of the world economy from firing up again in a big way.

The bottom line? There's good reason to believe that neo-confident US consumers will get out there this year and spend at a consistently higher pace. There's also comfort that they won't go whole-hog into a pre-crisis-style, no-holds-barred consumption and credit binge. That’s a pretty good piece of news for a global economy with high expectations for 2014.

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