Consumer debt levels remain high in the US and while it is helping to maintain spending on the high ...
Consumer debt levels remain high in the US and while it is helping to maintain spending on the high street its longer-term implications are more worrying.
Re-mortgaging by home owners is one area that has caught the attention of both JP Morgan Fleming and Close Property Investment. The key question is whether consumers are taking money out of their homes to finance a spending spree, or are using lower interest rates as an opportunity to consolidate their debts on more favourable terms.
It is important because for so long investors and institutions have been relying on the US consumer to help spend the US, and then world economy, back to full health.
Neither group has a clear answer to the question but their suspicions are that not every US consumer is budgeting for tough times ahead.
Tom Elliot, strategist at JP Morgan Fleming, notes that high levels of re-mortgaging and consumer spending appear to go hand in hand.
He says re-mortgaging has fallen by some 80% since its peak in May, but the level of activity that continues can still be considered high.
'People thought this would have an impact on consumer spending but it was still very strong in July,' he adds.
As such he is concerned that future rises in interest rates and unemployment might have unpleasant knock-on effects for the US consumer and economy.
JP Morgan Fleming is predicting that if any interest rate rise does occur it will not be until the end of the year and it is unlikely to be a sharp upwards move.
As justification for this view Elliot points to the fact the Fed is 'still quite bearish in its reports' on the state of the US economy.
Anthony Wyld, managing director of Close Property Investment, notes that in the US homeowners take out fixed-rate mortgages and tend to remortgage to lock into fixed lower rates. This implies that even if US rates were to rise in the future it would leave those with mortgages unaffected by the hike.
Wyld is sure that homeowners are taking liquidity from their property and spending it elsewhere. He adds: 'Consumer debt is rising and money is pouring out of the property market because of re-mortgaging. It would be interesting to know how much of the equity market is being driven by money as a result of re-mortgaging.'
Elliot notes there has been an increase in day-trading but it has been on a small scale.
'I do not really think investors are currently brave enough to put money from their homes into equities,' he says.
Unemployment is still rising in the US and this is a threat to the stability of the property market as well as consumer spending and re-mortgaging could slow down drastically if this situation deteriorates further, notes Wyld.
He adds: 'Companies are reducing their costs and because of this profitability is looking better but there is not much GDP growth and firms are cutting back and not investing in people.'
Elliot agrees the jobless nature of this US recovery is a warning sign that the future sustainability of growth is not assured, as consumption will eventually come under pressure if employment continues to fall.
Unemployment growth slowing.
Re-mortgaging helping equities.
Consumer spending holding up.
Pain thresholds key
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