2012 Begins with a Mixed Economic Outlook



  • Consumer sentiment is improving, but it remains far below pre-recession levels
  • Housing affordability rose to an all-time high in 2011

Here are a few quick stats from some Fed pieces that I read last week. Most everything contained in today’s blog is a direct quote from the different Fed pieces. I’ve listed the sources at the bottom of the article.

1. The total number of employees on nonfarm payrolls remains about 6.1 million workers fewer than at the start of the recession, a dramatic shortfall.

2. Auto sales fell dramatically below scrappage in 2009, the most recent year for which data are available. That was historically unprecedented, showing the severity of the auto sector downturn. Auto sales remain roughly in line with the scrappage trend, suggesting that December’s sales rate is easily sustainable and has room to run somewhat higher. (This speaks to pent up demand.) See chart below.

3. Consumer sentiment seems to have improved, though remaining far below pre-recession levels. Higher consumer confidence bodes well for purchases of big-ticket items, such as autos, furniture, appliances and homes.

4. The National Association of Realtors reported that housing affordability rose to an all-time high. (Home prices are low and mortgage rates are at all-time lows.) See chart below. In addition, the ratio of the cost of buying a house compared with the cost of renting one has fallen dramatically over the past five years and now is close to historical averages.

5. While 620 is generally considered a prime borrower, the median FICO score for prime borrowers has risen about 40 points to around 770. Thus, a prospective homeowner must have a much higher credit rating than in the past to qualify for a loan. See chart below.

6. Equity in household real estate peaked at $13.3 trillion in Q1 of 2006 before plummeting to $5.5 trillion in Q3 of 2011 (in 2005 dollars). See chart below.

7. During this time period, household debt fell to 113% of disposable personal income, a level not seen since 2004. Net borrowing fell as consumers defaulted on loans, paid down debt and took out fewer loans.

Comparing Wartime Deficits With Our Current Deficit

1. Wartime deficits are explained by large temporary increases in defense expenditure. However, revenue also increases – which results in a post-war fiscal surplus. Today, we have higher expenditures and lower revenue. Two-thirds of the increase was due to transfers. Revenue fell by 2.8 percent of GDP as a result of tax cuts, credits, rebates and depressed economic activity.

2. Output during the three wars increased significantly, whereas it is currently below trend.

3. Inflation increased substantially during all three wars. After WWII, high inflation was used to reduce the real value of accumulated debt.

4. Deficits are expected to continue until the end of FY 2014. By 2016, outlays (net of interest payments) are estimated to fall to about 19.8 percent of GDP, which is still 1.4 percentage points higher than the average from 2004 to 2008. Assuming revenues climb to 19.3 percent of GDP, debt held by the public will reach 68 percent of GDP, which would more than double interest payments in terms of output. These developments will create strong incentives to use inflation to reduce the financial burden of fiscal liabilities. An even greater incentive is the fact that over half of the debt is held by foreign and international investors. This “is a troubling scenario that should not be lightly dismissed.”


Fiscal Policy in the Great Recession and Lessons From the Past, by Fernando M. Martin

Twelfth Federal Reserve District Fed Views, by Eric Swanson

Where Are Households in the Deleveraging Cycle? by R. Andrew Bauer and Betty Joyce Nash


McCombs Senior Lecturer Sandy Leeds provides analysis of key market issues on his blog, Leeds on Finance, where this article originally appeared.


The views expressed are those of the author and not necessarily The University of Texas at Austin.

About The Author

Sandy Leeds

Distinguished Senior Lecturer, Department of Finance, McCombs School of Business, The University of Texas at Austin

Sandy Leeds, CFA is a Distinguished Senior Lecturer at The University of Texas at Austin. He teaches graduate level classes in the MBA program and...


#1 I love the article. You have

I love the article. You have a typing error in #5 above. I think you mean a 720 credit score is considered a prime borrower rather than a 620. Now, a borrower must have a 740 mid credit score to get the best interest rate on a mortgage. Thanks, Pam

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