Former Fed analyst: Household debt hurting recovery

WASHINGTON Thu Mar 22, 2012 1:13pm EDT

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WASHINGTON (Reuters) - The economic recovery will remain sluggish for years because many consumers have made little headway in paying down debt, according to new research from a former Federal Reserve economist.

Karen Dynan, now a fellow at Brookings Institution, argues that the process of reducing debt, which economists call deleveraging, has been far too slow to lay the groundwork for a more rapid economic rebound.

"The most indebted households appear to have made fairly limited progress repairing their balance sheets, suggesting that their consumption could be weak for some time to come," Dynan said in the paper.

In particular, Dynan says some 14 percent of Americans would need to reduce their debt load by the equivalent of more than a year's worth of pre-tax income - meaning they would have to curtail spending sharply.

"If this deleveraging were accomplished by saving alone, it could mean a fairly drastic cut in consumption for many years for a small but not negligible share of households," she writes.

The findings contradict some of the recent optimism on Wall Street, where stocks have rallied on hopes that a raft of better economic data might signal a more rapid growth spurt. U.S. gross domestic product expanded 3 percent in the fourth quarter but is expected to have slowed at the start of 2012.

But Dynan's findings cast doubt on the chances of a swift near-term rebound for the consumer-reliant U.S. economy, particularly given ongoing headwinds from Europe's own financial debacle.

The U.S. personal savings rate climbed as high as 5.8 percent as the recovery entered its second year in the summer of 2010, but has since waned to 4.6 percent. Data out earlier this month showed U.S. families took on more debt in late 2011 for the first time in 3-1/2 years.

(Editing by Andrea Ricci)

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