Americans to increase spending in 2014. Here’s how that affects Fed’s taper plan

There’s a growing belief that US economic growth will pick up pace in 2014.

One of the major reasons for that belief is that consumer spending, which accounts for roughly 70% of GDP, is expected to improve significantly.

In a January report titled “Within Sight of the Summit,” financial firm Goldman Sachs offers some interesting reasons for that expectation.

For a start, household net worth – the value of total assets minus total liabilities — hit an all-time high in the US in 2013, pumped up by strong housing and equity gains.

“In fact, last year’s estimated $9 trillion increase was the single largest on record,” the report noted. “The spirited home price gains that contributed to this improvement also strengthened home equity; just 13% of homeowners remained underwater on their mortgages at the end of last year, a significant improvement from 25% in 2011.”

That, according to Goldman Sachs. is a very good reason to expect consumers to become more relaxed about opening their wallets in 2014.

Increases in housing wealth make it easier for families to borrow against the equity in their homes, while overall gains in household wealth tend to make consumers more comfortable spending their money.

Of course, these gains are limited to households that own both houses and shares.

In addition, there are three other reasons for the positive outlook on US consumption.

As Goldman Sachs notes, the drag on consumer spending because of the high debt levels of households is reducing. As can be seen below, the chart indicates the debt-to-income level has reduced significantly, while the debt service ratio has also tumbled to historic lows.

consumerchart-GS

During the recession, US consumers cut back sharply as they found themselves swamped by heavy debts.

According to Federal Reserve data, the debt-to-income ratio in the third quarter of 2013 fell to 0.99 (Debt is equivalent to 99% of income). Household debt peaked at 122 percent of income in early 2009.

Rising net worth and lower debt service costs should reduce the need for precautionary savings and provide a boost to spending, says Goldman Sachs.

Here’s some more good news: Energy prices tumbled in the second half of 2013, which should lead to reduced business transportation costs and therefore, improved corporate profitability and consumer spending, according to the research report.

Finally, the US labour market also seems to be on the mend. “While the bulk of this improvement is rooted in the private sector, it is noteworthy that state and local payroll growth has also turned positive, removing a persistent drag,” the report added.

“Taken together, we expect these factors to support non-farm payroll growth of around 190,000 jobs per month,with unemployment falling to just above 6.5% in late 2014.”

So how does all this connect to US monetary policy?

Well, if consumers keep up/increase spending through the course of this year and economic growth speeds up, the Federal Reserve will stay the course and continue tapering its asset-purchase programme.

Improved consumer spending indicates an economic recovery in the US.

Soon enough, somewhere in the second half of 2015 possibly, the central bank will then have to start considering a modest hike in its super-low interest rates.

That will be unnerving news for global investors, already spooked by turmoil in emerging markets.

The $9 trillion bonanza is good news for American consumers and the economy, but it does spell trouble for global investors betting on continuing easy liquidity in the US.

[Image Credit]

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