Tyndall Monthly Commentary: USA buying now but will pay later

It has become almost an accepted fact that the US private sector economy is currently deleveraging and that it is this that is in some way holding back the economy’s rate of overall economic growth.  Over recent quarters, though, it has become apparent – at least to those willing to look – that far from deleveraging, the US private and public sectors are now showing a clear tendency to re-leverage and we firmly believe that it is this renewed credit boom process that is currently allowing the US economy to buck the global trend towards a new bout of economic weakness and therefore to produce the still-reasonable headline real economy data.  We are concerned, though, that this counter-trend growth may yet come at a considerable cost in the longer term.

Specifically, we find that US households are slowly beginning to re-leverage in absolute terms through the greater use of consumer credit to top up their still-modest rate of overall income growth.  What is often overlooked in any discussion of the US consumers’ position, though, is that were the Federal Government not borrowing quite so much, then it is very likely that the US household sector’s financial position and in particular its income growth would be very much softer than it is currently.  For example, if the Federal Government were to either raise taxes and/or reduce its expenditure, then household disposable income receipts would weaken as they have in Europe for similar reasons.  It is for this reason that we would fear the advent of any “US fiscal cliff” were it to occur but we can also suggest that US household incomes – and hence the current reasonable rate of US consumer spending growth – are at least partially dependent at present on the government’s own continued rapid rate of borrowing growth, as well as the consumer’s own borrowing exploits.