According to the OECD, US household gross debt to gross disposable income had fallen from 130.7 per cent in 2007, to just 107.9 per cent at the end of 2012.

According to the Fed’s latest US Financial Accounts, debt as a share of disposable income has fallen to 110 per cent, from 112 per cent at the end of last year.

At the same time US house prices have at last begun to rise, and both the Dow Jones and S&P 500 have recently hit all-time highs, which has pushed up the value of US assets. Paul Dales, Senior US Economist at Capital Economics, put it this way. He said: “The ratios of debt to net wealth and debt to assets have fallen to rates more in line with long-term trends.” He explained further: “Every $1.00 of debt is now backed by $6.30 of assets, whereas before the recession it was backed by $4.80 of assets.”

Okay, returning to OECD figures, US household gross debt to gross disposable income was just 96.4 per cent in 2000. So in comparison to that year, debt is still quite high. But the trend is clear. US households have seen their own balance sheets improve markedly.

When you think about it, the above data illustrates why the economy has struggled so much in recent years. Despite interest rates being at record lows, US households have engaged in some pretty drastic deleveraging. Economists who failed to spot the crisis in the making during the mid noughties, failed to grasp that US households had simply run out of puff, and that the combination of falling house prices and over indebtedness meant an extended period of readjustment was inevitable.

This adjustment may have a couple more years to run yet. But it is not unreasonable to assume that by the midpoint of this decade, the US consumer will be able to lead the US economy into a new growth period. In combination there are signs of companies moving their manufacturing back to the US, which is a trend that was predicted by the Boston Group some two years ago. Both Apple and Google, for example, have recently announced new products which, just like Bruce Springsteen, will be made in the USA.

In the UK we are seeing something similar, but on a smaller scale. UK household debt to income has fallen too. In fact it has fallen even more sharply than in the US, but then again it was much higher to begin with. OECD figures indicate that UK household gross debt to gross disposable income was 146 per cent at the end of 2012, around 25 percentage points down on the 2007 high, but still among the highest levels in the OECD. Maybe the OECD data is simply telling us the UK deleveraging process has longer to run. If the US will enjoy growth like it used to in 2015, maybe in the UK we will have to wait until, say, 2017.

But it is interesting to note that Tim Abbott, managing director of BMW UK operations, has forecast that the UK will be producing more cars than France by 2018, moving it into second place for car production in Europe.

So this is good news, albeit that the time frame is more stretched that we might prefer.

But good news can create bad news, and that is what the markets are worrying about. To find out why, read the next piece.

© Investment & Business News 2013

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