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According to a recent Economic Letter from the Federal Reserve Bank of San Francisco, “U.S. household leverage, as measured by the ratio of debt to personable disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal savings rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.”
Furthermore, according to Haver Analytics, “annualized, credit growth averaged 8% during the fifteen years ended 2007. Over an even longer time period that increase does not loom particularly large. However, against an average 5% growth in disposable income during those years, it precipitated a rise in the ratio to disposable income to 24% from a longer term norm of 17%.”
Taking into consideration both of these statistics noted above, the meat of the issue and the main cause of our current economic predicament is illustrated by the next statement contained within the aforementioned Economic Letter. “In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes.”
This past month the Federal Reserve also released data that showed revolving (credit card) debt has fallen 9.6% over the past year while non-revolving (automobile and consumer durables) has risen only fractionally. This combination has helped push the U.S. Savings Rate above four percent, a multi-decade high. We consider this contraction of consumer debt, either voluntarily due to a lack of demand or involuntarily as a result of a lack of availability, to be a permanent change in the spending patterns of American consumers that will negatively impact the strength of the current economic recovery. We believe the recovery, unlike past economic rebounds, will not be led by the housing or the automobile industry, purchases that results in debt accumulation. Unfortunately, thus far it has been led by government spending that will, hopefully, eventually give way to the private sector. Specifically, we find attractive for investment those sectors that export their goods and services to the emerging economies of the world; those industries that provide materials and services for the infrastructure build-out both here and abroad; and finally, those industries that provide goods that consumers can purchase without breaking the bank, namely those items under $500 (see Apple).
THE BOTTOM LINE – From its peak in 1989, Japanese Automakers are selling approximately fifty percent of that amount, locally. Automobile sales in the United States peaked at around seventeen million during 2007. We do not believe that U.S. automakers will suffer the same fate as those of their Japanese counterparts. However, we do not think it likely that we will see sales in the U.S. move back toward their old highs anytime soon. In addition to the sectors noted above, investors would be wise to look at companies such as Nike, McDonalds Corp and Pepsi or other companies that have a strong presence in the United States as well as growing sales abroad.