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Milton Ezrati is a partner, chief economist and market strategist at Lord Abbett & Co., LLC, a money management firm. He has been published in a wide variety of newspapers, magazines, and scholarly journals, including The New York Times, The Financial Times, The Asian Wall Street Journal, The Christian Science Monitor and Foreign Affairs on a broad spectrum of investment management topics.There's considerable evidence that consumer spending is not as weak as many fear. In fact, there likely will be a bit of a rebound this year. The operative phrase, however, is "a bit."
Jittery nerves over the economy and rising unemployment will restrain spending considerably, but the drop in fuel prices unexpectedly freed up cash for many consumers, says Milton Ezrati, chief economist at Lord, Abbett & Co. "Aside from all other, more transitory influences, households also need to work off some of the debt built up in past decades, and especially since 1997," Ezrati writes. "Though this deleveraging (in Wall Street jargon) will likely moderate consumer spending growth for years to come, households are not so constrained that they cannot support at least some increase in spending over time."
The economic crisis also appears to have been a wakeup call for many Americans, and, on top of reducing their debt, they are beginning to sock money away. While prudent, that will be another damper on spending even after the recovery sets in. If, as expected, current trends continue, "this ongoing savings rate effectively should improve household balance sheets at a rate of about 2% a year, whether households use the savings to pay down debt or to acquire assets," Ezrati predicts.
"At such a pace," he continues, "it would take quite a while for consumers to bring their balance sheets back to their status of, say, 1997, before their mortgage borrowing spree." How long? That's the bad news: He anticipates that bringing the national assets-to-debt ratio back to the levels of 1997 would take until about 2015. But look at it this way -- six years of more sober saving and borrowing habits is nearly half as long as the decade-long spending binge.
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