Trade Sep-Oct Interactive - page 7

E c o n o m i s t ’ s C o r n e r
I
t was early 2008, when US house-
holds reached their spending limit
and consumption expenditures
experienced their first quarterly
decline in seventeen years. The
slowdown was caused by a combina-
tion of falling employment and the
drying-up of credit markets. In the
boom years, which preceded the
crisis, rising real estate prices and lax
lending standards had not only
allowed but encouraged households
to sharply increase their liabilities.
But when house prices began to fall
and the credit cycle went into
reverse, the party was over.
Fast forward to mid-2013. I think
that the deleveraging of private
households is largely over. While
there is no generally accepted
definition of a sustainable debt level,
one frequently used deleveraging
target is that the debt-to-income
ratio returns to its historic trend. And
at (a still high) 110% of disposable
income, the debt level is now back to
this trend. To be sure, most of the
debt decline seen over the past five
years reflects accelerated write-
downs of delinquent mortgages
rather than active down payments.
Even so, household debt levels are
now much lower, and thus more
sustainable, than they were in 2008.
Another way to gauge the deleverag-
ing progress is to look at debt service
ratios. Here, the picture is even
brighter. According to the Federal
Reserve, the household debt service
ratio, which comprises required
payments on outstanding mortgage
and consumer debt, is now at its
lowest level since the early 1980s.
Admittedly, rising interest rates can
easily deteriorate this ratio, but given
the fact that the majority of house-
hold liabilities are fixed-rate mort-
gages, the impact is likely to be man-
ageable. Finally, the behavior of
households themselves signals rising
comfort with the current debt
situation. According to official
statistics, household credit market
debt has even eked out a 0.2% gain
in 2012. And as improvements in the
real estate market will eventually lift
home mortgages, that pick-up is
about to strengthen.
There can be no doubt that the
turnaround in household borrowing
will be an important support factor
for the short-term economic outlook.
One reason why the GDP growth has
remained lackluster thus far is that
the end of private deleveraging
marked the beginning of fiscal
consolidation. In that sense, the US is
following in the footsteps of Sweden
or Finland, where, in the early 1990s,
the deleveraging also began in the
private sector before it went on to the
public side. To add a final word of
caution: History has shown again and
again that while leverage can boost
economic performance and conceal
the erosion of competitiveness, the
effect is only temporary. Even worse,
the price for a credit-driven boom is,
more often than not, a costly bust. To
permanently improve the economic
outlook, without raising the risk of
another financial crisis, countries will
need to embrace structural, produc-
tivity-enhancing reforms. That holds
true for Europe, as well as for the
United States.
n
Consumers Ready To Take On More Debt Again
German American Trade Sep/Oct 2013
7
Bosch Rexroth Opens Marine
and Offshore Technology and
Service Center in Houston
Bosch Rexroth marked the opening of
its new Marine and Offshore Technol-
ogy and Service Center in Houston,
TX, with a ribbon-cutting and facility
tour for customers and local officials.
The new technology and service
center provides engineering services,
product sales, training and system
support for hydraulics and controls
technologies used in marine, offshore
and industrial applications. The
28,080 square-foot investment houses
14 expert applications engineers,
project engineers, technicians and
managers trained and certified to
deliver high-quality Rexroth service
and support. The company plans to
hire additional specialists later this
year and in 2014.
Dr. Harm Bandholz, CFA
Chief U.S. Economist
UniCredit Research
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