Consumer spending is widely acknowledge as the biggest driver of GDP so in these difficult times one has to wonder where in the heck did all this money go? I’ll hypothesize that money that would have been spent is going to pay down debt. Courtesy of Federal Reserve Economic Data (aka FRED), we can see a rapid reduction of household debt as measured as a percentage of disposable personal income.
To cover our bases, we also need to look at the denominator of that statistic to make sure nothing crazy is going on. Courtesy of the Bureau of Economic Analysis, we can see that disposable income is indeed holding steady. As an added bonus, we can also see that personal saving isn’t moving a whole lot either. So income is not getting spent any faster and not getting saved any faster so it’s safe to say that it’s going directly to paying down debt.
A solid recovery will need participation from the consumers so the logical question is how long will this deleveraging continue? Suppose consumers take down debt to historically low levels from the early 1980s, the trend line would take us out to 2010 Q1. Surely it could go down even more so let’s look at some other data.
Consumer sentiment has been stuck in a downtrend since the dotcom bubble and finally bottomed out during our last wonderful recession. If the current uptrend continues then it’s certainly possible that spending might start to pick up within the near future.
Another approach is to look at housing which was the original spark for our latest recession. Courtesy of FRED again, we can see the monthly supply of homes explode in 2006 portending the doom that would come in 2008. We’ve already worked through a lot of excess supply at just six months supply. Cheap money and lax lending standards artificially drove down supply in the early 2000s so we really don’t want to get down to that unhealthy four month level.
Adding this all up, it is reasonable to expect consumer deleveraging to end sometime in 2012. With a bit more consumer confidence (lower unemployment and less dysfunctional government), the consumer could be ready to drive the economy forward again.