Will the US Consumer Come Back in 2011?

Guest Author: Russ Koesterich is Global Head of Investment Strategy for BlackRock Scientific Active Equities. He previously served as Senior Portfolio Manager in the US Market Neutral Group for Barclays Global Investors. Koesterich is the author of “The ETF Strategist” and “The Ten Trillion Dollar Gamble“.

Cell phones, portable DVD players, and iPads have changed many aspects of contemporary culture, including the family car trip. Today, most kids are quietly absorbed in a movie or video game and have to be pried from the car when you finally arrive at your destination. In contrast, thirty years ago parents were still contending with the constant cry of “are we there yet”. As we enter the holiday season, like the adolescent of thirty years ago, economists and reporters are asking the same question again and again – is the US consumer ready to get back in the game? The answer is “no.”

While the death of the US consumer has been somewhat exaggerated, there is no doubt that people are spending less and saving more than they did during the boom years. The US savings rate has gone from less than 1% in 2005 to around 6% today. While this is a positive long-term development, it is making for a slow, uneven, and uninspiring recovery. Unfortunately, this is likely to continue in 2011.

Consumers are spending less for a variety of reasons, but all of which can be boiled down to three words: jobs, wealth, and debt. Starting with jobs, while the US economy is recovering, job creation is stalled. If the US follows the same pattern of other countries that have experienced bursting credit bubbles, job creation will return slowly and in fits and starts. And even for those who have jobs, wage growth is anemic; meaning purchasing power for most families is stagnant.

The second problem for consumers is that they are worth much less than they were three years ago. Even after the recent rebound in the stock market, household net worth is down by more than $12 trillion dollars, or nearly 20%, from its peak. Given the headwinds facing the housing market, it will be many years before household wealth reaches its pre-crash levels.

The collapse in household wealth would be challenging under any conditions, but it is compounded by the fact that while wealth has dropped, debt has not. The housing bubble was fueled by a mortgage binge, which took total mortgage debt in the US from $5 trillion to $10 trillion in the space of just six years. As a result, consumer debt went from 95% of income in 2001 – which by the way was still high by historical standards – to an unprecedented 130% by 2007.

And despite three years of trying to repair the damage, consumer debt is still lingering at an unsustainable 118% of disposable income. In order for consumers to start to spend more aggressively, they will need to further repair their balancesheets. This will take time. In short, we’re not there yet.

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