The U.S. recovery during the past seven years has closely followed the average experience of other industrialized countries that have been through a similar credit-driven housing boom and bust. If anything, the decline in U.S. output has been slightly worse and the recovery more drawn out than suggested by the previous cycles.
It is tempting to blame the fiscal consolidation in the U.S. for this difference, but in fact, the scale and pace of fiscal drag has been quite similar in the U.S. compared to the other countries. Another possible reason is that the comparable (mainly Scandanavian) countries are more dependent on trade and were able to devalue their currencies, which helped speed the adjustment process and recovery. Most likely however, the main difference stems from the fact that the deleveraging episodes in these other countries took place when the global backdrop was much healthier than it is today. The U.S. housing bust exposed weaknesses and spawned adjustments in many other countries around the world.
Nonetheless, we point to the recent bottoming in home prices as a key turning point in the cycle. The household deleveraging process is well-advanced: the ratio of household debt to income in the U.S. has returned to trend, while debt to net worth has returned to pre-bubble levels. Meanwhile, our ‘wealth effect’ indicator suggests that a further acceleration in retail spending is likely.
[Hear More: Gerald Howard: A Real Recovery in Real Estate, But Regulators Are Impeding Lending]
Perhaps most important, there is preliminary evidence that the deleveraging cycle is at an end. The latest quarterly report on Household Debt and Credit from the New York Federal Reserve indicated that the total amount of consumer debt outstanding rose by $127 billion in the third quarter, the largest increase since 2008. Delinquency rates on most types of consumer debt also showed continued improvement during the period.
Bottom Line: The deleveraging cycle in the U.S. is drawing to a close.
