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As we’ve talked about several times here consumer spending (which accounts for about 70% of the economy according to Bloomberg) has been fueled by mortgage equity withdrawal or MEW. Calculated Risk has done extensive studies of this effect as well.
To give you an idea of how much this MEW fueled consumer spending consider this:
Borrowing against home equity financed 2.1 percent of consumer spending in 2005, up from a 0.6 percent average between 1991 and 2000, former Federal Reserve Chairman Alan Greenspan said in research published this week.
In the same article Paul Kasriel of Northern Trust Securities in Chicago mirrors our thoughts about the link between a falling housing market, reduced refinance products and consumer spending:
“We’re in a housing recession; it’s not over and it’s going to spread to other parts of the economy, mainly consumer spending,” said Paul Kasriel, director of economic research at Northern Trust Securities in Chicago. “House prices are going to continue to fall, and that’s going to play havoc with consumers because it means the home ATM is now draining, it’s no longer filling.”
What does this mean? It seems to point to a significant slowdown in overall economic growth for the country. Consumer spending has been the economic engine over the last few years, keeping the economy humming along. With the plug pulled on the excess cash that has been put in to the market by appreciating home prices and the subsequent cashing out by home owners the economy will need to find a new driver for the foreseeable future.
