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October 17, 2012

Consumers Paying Down Debt Helps Boost U.S. Expansion

Anita Bullock-Morley was $57,000 in debt on 27 credit cards and close to filing for bankruptcy in 2007. With help from an Atlanta counseling service, the 37-year- old says she paid about $1,400 a month and cleared her balances. Now she’s used cash to buy an $800 iPad and upgrade her iPhone.

Three-plus years into a recovery from the worst financial crisis since the Great Depression, Americans finally are getting their finances back into shape, Federal Reserve figures show. Household debt as a share of disposable income sank to 113 percent in the second quarter from a record high of 134 percent in 2007 before the recession hit. Debt payments on that basis are the smallest in almost 18 years, while the delinquency rate for credit cards is the lowest since the end of 2008.

“The household deleveraging process is largely over,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Credit use should soon go from being a significant headwind to the economy to a tailwind.”

The progress that consumers have been making will allow gross domestic product to absorb stepped-up deficit reduction by the federal government next year and keep on expanding, Zandi said. He sees GDP growing 2.1 percent in 2013, a bit slower than this year’s projected 2.2 percent, as Congress allows some, but not all, of the scheduled year-end tax increases and spending cuts to go ahead. The GDP number will mask stronger growth for the private side of the economy, to 3.6 percent from 3.1 percent, he said.
Consumer Resilience

In a sign of consumer resilience, retail sales rose 1.1 percent last month after advancing 1.2 percent in August, the biggest back-to-back monthly increase since late 2010, according to Commerce Department figures released today in Washington.

The improvement in consumption will lead to higher valuations for “riskier assets,” including U.S. (SPX) and emerging- market stocks, said James Paulsen, chief investment strategist in Minneapolis for Wells Capital Management, which oversees about $325 billion.

“The financial sector is the biggest beneficiary,” Paulsen said, referring to the shares of banks, insurers and investment companies. Their valuations have been based “on a rear-view mirror looking at the past five years and not looking ahead.”

Automobile companies -- and their shares -- also stand to benefit as consumers become more willing to buy cars using credit, said Brian Johnson, a senior research analyst in Chicago for Barclays Plc. He’s recommending investors overweight the stocks of General Motors Co. (GM) and Ford Motor Co. (F) in their portfolios. The former’s shares have risen 21 percent so far this year, while the latter’s have fallen 6 percent (F).
Asset Prices

The rebuilding of household balance sheets has been helped by a rise in asset prices, particularly equities. The Standard & Poor’s 500 Index has climbed 111 percent since hitting a nadir in March 2009. Home prices also are beginning to rise, jumping in the second quarter by the most in more than six years, according to the S&P/Case-Shiller index.

The result: Household net worth as a percentage of income rose to 527 percent in the second quarter from 477 percent in the first three months of 2009, at the height of the financial crisis, according to figures from the Fed. While that’s lower than the 652 percent peak hit in 2006, it’s higher than the 515 percent average that’s prevailed since 1980.
Easy-Money Policy

The Fed’s easy-money policy -- keeping its benchmark federal funds rate near zero since December 2008 -- also is helping Americans put their finances on firmer footing. Taking advantage of record low mortgage rates, many borrowers are refinancing into shorter-maturity loans so they can pay off their balances more quickly.

“People are opting for faster amortization,” said Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association in Washington.

With refinancing near a three-year high, he reckons that two in five home owners who went through the process in August cut the term of their debt.

Some borrowers are focusing on reducing their payments. Cyrus Cousins, 32, of Austin, Texas, will cut his monthly debt- service costs by about $300 after he refinances into a 3.5 percent mortgage.

“A new car is in the mix for my wife,” who drives a 1994 Honda Accord, said Cousins, who works for a coffee wholesaler and retailer. The savings also could contribute to remodeling their 1935 house by adding a second story with an additional bedroom and bathroom and help pay expenses associated with “starting a family,” he said.

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