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Weekly Economic Commentary


Household Deleveraging Metrics Raise Worrisome Questions

August 25, 2011

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Household debt outstanding hit a peak of $13.9 trillion in the first quarter of 2008.  This staggering amount of household debt was close to 100% of GDP of the nation (see Chart 1).  Home mortgages and consumer credit make up household debt, with home mortgages accounting for roughly 75% of household debt. 

DEC 8/25/2011 Chart 1

A large part of the sharp accumulation in debt has occurred since the second-half of the 1990s.  The median increase in household borrowing per year during 1953-2010 is $114.7 billion (see horizontal line in Chart 2).  There was a gradual upward trend in household borrowing which exceeded the historical median in 1980s and 1990s; the outsized increase occurred during the ten years ended 2008.  In other words, the atypical accumulation of debt which exceeded historical norms was spread over a span of ten years. 

DEC 8/25/2011 Chart 2

Narrowing the period of investigation to the last four years, households are not increasing their liabilities but household debt has shrunk in each of the twelve quarters ended 2011:Q1 (see Chart 3).  Deleveraging is the process of reducing debt and borrowing less.  The cumulative decline in household debt during the last twelve quarters amounts to $608.43 billion (see Chart 4).  A reduction of household debt could be involuntary (charge-offs, tightening credit standards) or voluntary (consumers choosing to borrow less and paying off outstanding debt).  The bottom line is that a reduction of household borrowing implies a reduction in spending and therefore a lower GDP headline number.  A New York Fed study has attempted to identify the nature and causes of household deleveraging and concludes that “observed deleveraging seems likely to have involved reductions in both the demand and supply of credit.”  The conclusion suggests that policies to increase the demand and supply credit are necessary in the near term.  More importantly, the duration to complete the process of deleveraging could be an extended period with significant adverse macroeconomic consequences. 

 DEC 8/25/2011 Chart 3


DEC 8/25/2011 Chart 4


Strike Lifts Initial Jobless Claims, But Underlying Trend Still Worrisome

Initial jobless claims rose 5,000 to 417,000 during the week ended August 20, following an upward revision of the prior week’s tally (412,000).  Striking workers at Verizon raised the count of initial jobless claims, which should be reversed in the subsequent weeks.  A total of 45,000 Verizon employees were not on payrolls during the survey period for the August payroll employment report, which could setback payroll readings of the month.  Continuing claims, which lag initial jobless claims by one week, fell 80,000 to 3.641 million.  The four-week moving average of initial jobless claims stands at 407,500, which is significantly higher than levels consistent with a growing economy. 

DEC 8/25/2011 Chart 5


Who Will Be Japan’s Next PM?

By Iesha Montgomery

As expected, Japan will get its sixth prime minister in the last five years early next week. Prime Minister Naoto Kan has agreed to resign and dissolve his cabinet once his Democratic Party of Japan (DPJ) votes on a new leader on August 29. The race has been narrowed down to five candidates; however, only one has a large measure of popular support. A recent poll showed 29% of the public preferred Seiji Maehara, but, unfortunately, in Japanese politics public opinion does not always mean much. The race will be won by whoever secures the support of former DPJ president Ichiro Ozawa’s faction. There are 398 voting DPJ Diet members, Ozawa’s has the largest faction with nearly 120 members, and the winning candidate needs to secure 200 votes. The math of the situation dictates that a candidate either needs Ozawa’s blessing or a large number of faction defections. Ozawa is demanding allegiance to the party’s 2009 manifesto, which included no tax increases, and would like his party privileges reinstated if he is acquitted of fraud as the price of his support. Currently, Maehara is the only candidate who has not signaled his willingness to reinstate Ozawa. The run-down of candidates is as follows:

 Sumio Mabuchi

Mabuchi served as transport minister before being replaced in a Cabinet reshuffle in January 2011. He currently serves as a special advisor to PM Kan for disaster relief and recovery. He is campaigning on a platform to reduce Japan’s reliance on nuclear power. Mabuchi may receive support from the Ozawa faction.

Banri Kaieda

The current industry minister with responsibility for energy policy is pinning his election hopes on winning over kingmaker Ozawa. Kaieda has publicly pledged to lift Ozawa’s party suspension if he is elected. He is a member of former Prime Minister Yuko Hatoyama’s DPJ faction and cannot win without the support of Ozawa’s group. He is seen to have lost some support when he backpedaled from pledges to resign from Kan’s cabinet.

Michihiko Kano

The farm minister is in his 11th term in the lower house and is known for his dedication to turning Japan into a genuine two-party state. Kano came to prominence when he narrowly lost to Ozawa in the presidential election of the now-defunct New Frontier Party. He now needs the support of his old nemesis. Kano is relying on his experience and reputation for stability.

Yoshihiko Noda

Noda serves as finance minister and was widely favored by anti-Ozawa factions less than a week ago. However, Noda’s preference for tax increases to help reduce the deficit and his suggestions of a grand coalition with Liberal Democratic Party (LDP) and New Komeito alienated many rank-and-file DPJ members. His stance on taxes has made it unlikely that he would be able to secure the necessary votes. The LDP has signaled its preference for working with Noda.

 Seiji Maehara

The former foreign minister enjoys the most popular support of any of the candidates. His late entry into the PM race is widely believed to be the result of Noda’s inability to secure support from anti-Ozawa factions in the DPJ; the two men will split the anti-Ozawa vote. Maehara was generally considered to be a PM in waiting before he was forced to resign from his cabinet post in March 2011 after admitting to accepting several donations totaling $3,000 from a ethnic Korean permanent resident of Japan and his return to the fold so quickly after the scandal has taken some by surprise. Like most of the other candidates, Maehara is against any immediate tax hikes. He has the support of many younger Diet members who are relying on his popularity to retain their constituencies in parliamentary elections scheduled for September 2012. Acting DPJ president Yoshito Sengoku is seen to back Maehara and is actively lobbying the Ozawa faction; however, a sticking point may be Maehara’s reluctance to lift Ozawa’s suspension if he is acquitted of fraud.

 If the DPJ heeds public opinion and considers its best chances of winning parliamentary elections in 2012, Seiji Maehara will be the next PM. However, no matter who wins the election, the hard decisions necessary to spur growth and reduce debt will not be taken in the next year. This is due in some part to the hung parliament the new PM will inherit, but the biggest reason is lack of political will. Unfortunately, the policy uncertainty that Moody’s noted for a reason it downgraded Japan this week will continue to be a fixture of Japanese politics for the foreseeable future.






The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.