Dear Bernanke, Here’s Why The “Wealth Effect” Isn’t Saving The US Economy
Gregory White
Business Insider
3/1/2011
Yesterday’s weak consumer spending numbers, along with weaker than expected Q4 GDP, may be indicating that the consumer recovery in the U.S. isn’t all it seems.
But if incomes are up and the stock market is up, where’s the drag?
It may be in the housing market, according to RBC analysts.
The bigger picture is that the housing market remains mired in excess. Our economists estimate that 7 million units of “shadow inventory” – delinquent loans plus loans in the foreclosure pipeline – wait in the wings. On top of the 8.1 months of visible supply, the “shadow inventory” represents an additional 18 months of supply at the prevailing pace of sales. It is no wonder that homebuilders’ sentiment, which displays a strong positive correlation with consumer spending, remains depressed (Exhibit 4, LHS). Household balance sheets could be placed under renewed downward pressure in the event of a deeper house price slide (Exhibit 4, RHS), a risk that will escalate further absent better jobs data.
With homebuilder sentiment still low, and home prices continuing to fall, there’s the threat that this consumer recovery is already petering out.
And with home prices now falling again, there’s all the more reason to be concerned all that extra income will be used to pay down debt, rather than spend, and drive the U.S. consumer recovery.
The article continues, with graphics, at Business Insider.
Related: 15 signs the U.S. housing market is heading for a complete and total collapse
Update: Related articles, Bernanke says lasting rise in oil prices poses a danger and blogger R. S. McCain says liberals are stuck on stupid when it comes to mortgage write-downs.
