By Steven K. Beckner

(MNI) – Research released by the Federal Reserve Bank of Cleveland
Thursday finds that lost household wealth has been a drag on the pace of
the recovery, but also suggests that the economy may be on the verge of
a stronger upswing.

Cleveland Fed economists Timothy Bianco and Filippo Occhino, in an
Economic Commentary, write that “falling home and financial asset prices
have combined to weaken the average household’s balance sheet, and this
has helped to slow down the current recovery.”

The economists examine the role that household balance sheets have
typically played in postwar business cycles and assess their importance
in explaining why some recoveries, including the current one, have been
weaker than others.

Bianco and Occhino note that the “very strong” pace of past
recoveries has not been seen during the current recovery. They note that
“it took three years for real GDP to return to where it was just before
the start of the recession.”

Seeking to explain the sluggishness of the recovery, the economists
maintain that “one factor behind the slow recovery has been the weakness
of household balance sheets.”

“During the financial crisis, the values of real estate assets and
financial assets plunged, lowering household net worth and raising
leverage,” they write. “To repair their balance sheets, households have
been increasing their saving rate, raising the average from its
pre-recession level of around 2% to its current level above 5%.”

“This deleveraging process has slowed consumption and, as a result,
the recovery,” they added.

Bianco and Occhino find that balance sheet shocks have played “a
greater role” in slower recoveries such as this one and that “since
about 1985, balance sheets have deteriorated more in response to adverse
macroeconomic shocks than they used to.”

“As a result they have amplified and propagated the direct
contractionary effects of the shocks,” they say.

However, on a more hopeful note, the economists say their research
results also suggest conditions may be “improving.”

“While households have been saving at a high rate to repair their
balance sheets for some time, there have been signs that this
deleveraging process has attenuated,” they write. “Household leverage
has come down from its peak and the saving rate has leveled out.”

“These signs may point to a stronger pick-up of consumption and a
more robust recovery,” they add.

** Market News International **

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