Geoffrey Hauschild / Wagner Intl. Photos Ellen Zentner, chief U.S. economist for Morgan Stanley
The next recession won’t be the fault of U.S. households like the last one was, said Ellen Zentner, chief U.S. economist at Morgan Stanley and the winner of the Forecaster of the Month contest for August.
The Great Recession of 2008-09 was caused by excessive and imprudent borrowing by U.S. households. Between 2001 and 2007, American households took on more than $5 trillion in mortgage debt (and more than $6 trillion in total debt)—an unprecedented credit boom that brought down the economy and very nearly the financial system when it burst.
Read more coverage of the 2008 Financial crisis.
But households have become much more responsible since then, Zentner said in an interview. “I’m encouraged by the prudent debt management of households.”
In economists’ terms, households had overleveraged their balance sheets, resulting in many of them spending more than they earned.
Then following the crisis, they deleveraged, constraining consumption.
Between 2008 and 2014, households shed about $1.5 trillion in debt, bringing their balance sheets back into line. Since then, households have taken on some additional debt, but their income has grown faster. The debt-to-income ratio today is the lowest since 2002.
Also: Americans owe more money than ever, but no, they are not being crushed by debt
Household leverage is so important, Zentner said, that she thinks that we ought to think about the current expansion as beginning in 2014, when households began taking on more debt, rather than in 2009 when the recession officially ended.
“Every macroeconomist has a love,” Zentner said. “You have to be able to do it all, of course. But there’s always one thing you have a passion for. For me, it’s the U.S. consumer. I’m obsessed with the household sector—which is good because it’s 70% of the economy.”
Zentner said the household sector—326 million Americans—is well positioned to weather higher interest rates.
At the height of the bubble, much of household debt was tied to a variable-interest rate. That was risky, because many of the worst mortgages of the time had low teaser rates that ballooned into unaffordable payments just as home prices fell, shutting off the possibility of refinancing. It was the ensuing defaults that brought down the big banks.
As households deleveraged after the recession, they also locked in extraordinarily low interest rates. “Only 7% of household debt is subject to variable rate,” she said. About 90% of mortgage debt is fixed interest, and the effective rate for all mortgages is now just 3.8%.
So the household sector has some immunity to tighter monetary policy, giving the economy a lot of resiliency as the Fed raises interest rates. In fact, Zentner said, U.S. households as a whole may actually benefit from higher rates because the extra interest they earn on their savings could exceed the extra interest they’ll pay.
If there’s a credit problem lurking out there, it’s on the corporate side, she said. Nonfinancial corporate businesses have taken on $2.6 trillion in debt since Lehman Brothers failed, and a lot of it must be rolled over in the next two years. “You have to watch the spreads,” she said. Higher rates could squeeze the weakest borrowers and their creditors.
Private-sector debt: How to spot the next financial crisis
Morgan Stanley’s forecasts Number as reported* ISM 58.8% 58.1% Nonfarm payrolls 199,000 157,000 Trade deficit No forecast -$46.3 billion Retail sales 0.4% 0.5% Industrial production 0.1% 0.1% Consumer price index 0.1% 0.2% Housing starts 1.234 million 1.168 million Durable goods orders -1.5% -1.7% Consumer confidence index 126.2 133.4 New home sales 627,000 627,000 *Subject to revisions
In the August contest, Zentner and her team—economists Jeremy Nalewaik, Robert Rosener and Molly Wharton—won our monthly contest with some impressive forecasts. On three of the 10 indicators we track in our contest (retail sales, new home sales and industrial production), Morgan Stanley’s forecasts were the most accurate among the 45 forecasting teams. On three others (ISM, housing starts and durable goods orders), its forecasts were among the 10 most accurate.
It’s the seventh time Morgan Stanley’s economics team MS, +1.01% has won our monthly contest, and the third time Zentner has led the winning team.
In August, the runners-up were Christophe Barraud of Market Securities, Michael Gapen’s team at Barclays, Brian Bethune of Tufts University, and Joerg Angelé of Raiffeisen International Bank.
The MarketWatch median consensus published in our Economic Calendar includes the predictions of the 15 forecasters who have earned the most points in our contest over the past 12 months, plus the forecast of the most recent winner of the monthly contest. When they differed, the MarketWatch consensus was more accurate than the closely followed Bloomberg consensus 65% of the time in 2017.
The top forecasters over the past year are Jim O’Sullivan of High Frequency Economics, Ryan Sweet of Moody’s Analytics, Barraud of Market Securities, Angelé of Raiffeisen, Pat O’Hare of Briefing.com, Peter Morici of the University of Maryland, Richard Moody of Regions Financial, Brian Wesbury and Bob Stein of First Trust, Avery Shenfeld’s team at CIBC, Michelle Meyer’s team at Bank of America Merrill Lynch, Jan Hatzius’s team at Goldman Sachs, Michelle Girard’s team at NatWest Markets, Gus Faucher of PNC Financial, Spencer Staples of EconAlpha, and tied for 15th: Stephen Stanley of Amherst Securities and Ian Shepherdson of Pantheon Macro.
