Americans With Best Credit in Decades Renew Economy in Borrowing
Comment of the Day

August 06 2013

Commentary by David Fuller

Americans With Best Credit in Decades Renew Economy in Borrowing

This article by Shobhana Chandra and Steve Matthews for Bloomberg may be of interest to subscribers. Here is a section

Americans have made progress putting their finances in order and are ready to borrow again – giving / the world's largest economy another driver of spending and growth.

Household net worth soared to a record high in the first quarter, Federal Reserve data show, and the financial-obligations ratio relating consumer debt to income matched the lowest in 33 years. Consumer loans are rising, and the American Bankers Association reports the share of delinquencies on bank cards is the smallest since 1990.

“Household finances are in the best shape in decades,” said Joseph Carson, director of global economic research at AllianceBernstein LP in New York, with $435 billion in assets under management. “We now have a creditworthy borrower. It's a powerful ingredient” for the U.S. expansion and “definitely a step up from where we have been.”

Credit is thawing gradually for residential mortgages, one reason new-home purchases in June reached the highest since 2008. Lenders also are easing standards for auto loans to expand the pool of buyers and drum up more business. That has put car sales on track for the best pace since 2007, helping companies including General Motors Co., Ford Motor Co. and parts maker Lear Corp. to report better-than-estimated earnings.

Gabriela Magallanes, 23, a Raleigh, North Carolina, hospital research assistant, bought a black 2013 Hyundai Elantra in May after her 24-year-old car broke down. She tapped the auto manufacturer's finance subsidiary for a 60-month loan at 2.9
percent, with monthly payments of $337.

David Fuller's view Some would argue that the aggregate level of debt in the USA has not contracted since 2008 so there has been no measureable deleveraging. However, this misrepresents the issue. If we break debt down into three groups we get a better picture of the situation.

The US government took on a massive additional debt burden as it socialised private sector liabilities during the credit crisis. This has increased as growth was slow to reignite. Political impasse has been one of the more notable repercussions and we are now approaching a fresh political carnival where the debt ceiling will again be the central topic of conversation.

Corporations binged on debt, locking in the lowest cost of capital anyone could ever have imagined. The medium-term nature of much of this funding can be classed as a balance sheet optimisation rather than a specific issue investors are worried about at present.

Consumers went through a painful consolidation which forced individuals and families to tighten budgets, defer spending, accept lower wages and pay down debt. The result is that the consumer balance sheet is now on aggregate in better shape and demand for goods, services and credit is beginning to recover. Considering the deflationary pressures the Fed has been combating the re-emergence of consumer demand could coincide with greater potential for self-sustaining growth and a pickup in the velocity of money. This should increase the possibility that the tapering of quantitative easing will take place in the latter portion of the year.

The export sector and those that were able to offer low cost products have thrived over the last five years. I thought it might be interesting to identify US companies that are heavily dependent on the US for their revenue.

The recovery of the financial, real estate and banking sectors has been commented on in Fullermoney on a number of occasions over the last few years. The food and retail sectors have also thrived over the last few years by tailoring their offering.

ConAgra Foods for example has intensified its focus on health foods. The share broke out of a two-year range in September and found support in the region of the 200-day MA from early last month. It is now somewhat overextended once more but a sustained move below the 200-day MA would be required to question medium-term upside potential.

Ultra Salon Cosmetics is also worthy of mention and while it has a relatively pricey valuation at a P/E of 33, it should do well as demand for pampering increases. The share broke successfully above the psychological $100 level this week and a clear downward dynamic would be required to question potential for additional upside.

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