The State of Consumption and Policy Debates

Focusing on one side of the balance sheet for consumers and corporations from a big picture standpoint you have: debt (liabilities) and net worth (equity). Adding up government, business and consumer debt, we are sitting at a nominal record of $36.5 trillion in debt. Looking specifically at the consumer debt numbers, we are in slightly better shape than we were in 2009 but still significantly above our historical average debt level relative to GDP:

• Current Total Household Debt (6/30/11): 66% of GDP
• Total Household Debt in early 2009: 76% of GDP
• Historical Average Total Household Debt: 37% of GDP

According to the Federal Reserve’s Flow of Funds data, total US consumer debt is down from the $13.93 trillion peak at the end of second quarter of 2008 to $13.30 trillion at the end of the second quarter of 2011. That’s a decrease of only $630 billion over three years, or only 210 billion a year.

So far this is not a pretty picture; let’s look at the other part.

On the other side of the balance sheet picture is net worth.US consumer’s net worth is down from the $65.9 trillion peak in 2007 to $58.5 trillion at the end of the second quarter this year. That’s a decrease of $7.4 trillion dollars. If consumers are only paying off $210 billion a year in debt (assuming everything else is equal) it would take roughly 35 years for household net worth to reach the 2007 peak of $65.9 trillion dollars.

The consumer balance sheet is not a pretty picture. Even though it appears to be heading in the right direction, it has a long way to go. The consumer needs to continue to repair their balance sheet and this means the consumer will have less of a desire to speculate, consume, and invest.

Based on this scenario it would be nearly impossible to get the net worth of the consumer back to the 2007 peak without somehow putting more dollars in the consumers’ pockets. This is one thing I think Washington DC understands which is why we are seeing so many discussions around fiscal policy. However, Washington also understands adding to our government debt is not a widely acceptable solution and leaves us in a consumption paradox.

Until we get to earnings season we will unfortunately only have a few economic data points and a public fist fight on policy. You can be certain the coming weeks will continue to be very volatile in our equity markets as the policy debates rage on in Washington. None of this will ease concerns in the markets.

However, if you can look past this short term phase of political silliness and focus on maximizing returns it might be wise to capture some attractive yields in the market. We’re focusing on high quality dividend growth and high dividend paying companies on the equities side, and bonds just below investment grade that still have an attractive higher yield. Frankly, as long as we select companies that can continue to pay the rent (dividends or interest payments) price fluctuations are less meaningful in the short run.

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