Household and business deleveraging to slow consumer spending

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Economic conditions are improving faster than anticipated for businesses and households.

But deleveraging by businesses and households is expected to slow nonresidential investment and consumer spending during 2010.

During fourth quarter 2009, households continued to rebuild their financial portfolios, posting the third consecutive quarter of increase in household net worth. After losing $13.1 billion during 2008, households recovered $2.8 billion of net worth during 2009, according to a BBVA Economic Research Department report.

Although upward trends in net worth usually restore consumer confidence, this time around household spending could remain tight. After all, consumers recovered only a fraction of their lost net worth.

Both non-liquid and liquid assets improved. But the ratio of liquid to total assets remains higher than pre-recession levels.

Since the stock market crash, investors have shown a preference for assets with less risk.

For the fifth consecutive quarter, credit market debt declined, edging down 0.4 percent during the fourth quarter of 2009.

Mortgages are stabilizing on a year-over-year basis, which could be a result of the improvement in home sales, while both mortgages and consumer debt dropped for the quarter.

Finances for businesses are also recovering.

Nonfarm, nonfinancial corporate profits rose 22.4 percent last quarter –  a 66.3 percent increase, year-over-year.

After plummeting 23.8 percent during 2008, business profits only recovered 0.2 percent during 2009.

Businesses will likely remain cautious, as shown by the third successive quarter of declines in business indebtedness.

Total non-financial credit market debt dropped 0.6 percent, quarter-over-quarter, 1.7 percent below last year’s levels.

The issuance of corporate and municipal bonds rose, while the use of commercial paper, mortgages and bank loans continued to drop.

Capital spending could be constrained moving forward, as businesses are unwilling to take on debt, coupled with the limited availability of credit.

BBVA economists said the data show mixed signals for both household and business spending.

Household wealth and corporate profits are improving but  remain at low levels, while simultaneously, household and business debt is shrinking.

The economy will grow this year,  but at a moderate rate.