Moody’s Analytics’ June 16 Weekly Market Outlook has some interesting charts.

Figure 1 shows the strong correlation since 1999 between household net worth and spending on goods. The wealth effect intentionally created by the QE2 program has worked but could be about to unravel given the state of the housing market and the recent correction in stock prices.


All the recent gains in household net worth have come from rising equity prices.


But the reality is that employment is not recovering, real wages are declining and house prices are double dipping. The decline in the savings rate from 6.3% in June 2010 to 4.9% in April 2011 has boosted total expenditures by $165B (annual rate) in April or 1.5%. Without the dip in savings, consumer spending would have risen only 3.3% YoY in April. Since the US CPI was 3.2% in April and 3.6% in May, real spending would now be contracting.


The savings rate has not declined below 5% since 2009 underscoring the need for consumers to deleverage, a process that has really only begun.


The renewed decline in house prices can have serious consequences on the US economy. Not only because of underwater mortgages and related bank losses, but also because of the close link between house prices and consumer debt:


And if you add a declining stock market…

Saint Ben will soon need to act again.


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