DEUTSCHE BANK: The Deleveraging Is Almost Over
But when that bubble burst, households retrenched their finances by cutting back on all of that debt (i.e. they delevered).
In a new note to clients, Deutsche Bank economist Joe LaVorgna argues that this economically painful deleveraging process is almost complete.
Assuming perpetual nominal GDP growth of 4.5%, which is only slightly higher than the 4.3% gain registered over the four quarters ending Q3 2012, and assuming steady liabilities, which actually continue to fall modestly, means that household debt to disposable income will be back at long-term equilibrium by Q2 2014. Of course, nominal GDP growth could turn out to be faster, especially once the budgetary noise from Washington dissipates. A 5% rate of nominal GDP would put us at equilibrium one quarter earlier.
Furthermore, LaVorgna believes this final leg of deleveraging will be smooth sailing, relatively speaking.
...we highly doubt the last one sixth of the deleveraging process by US households will be as painful as the preceding five-sixths of the process, over which time outright debt actually fell. Much of the decline was due to bankruptcies and mortgage foreclosures. Thus, the headwind for further deleveraging should be de minimis at this point in the business cycle.
This is all good news.
"Eventually, we expect households to re- leverage, which would act as a tailwind to economic activity," he writes. "Conceivably, we could even be in the very early stages of a re-leveraging cycle based on the fact that private consumer credit is no longer falling.
Here's the chart:
