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Northern Trust has been warning for some time that the U.S. has already entered a recession. In Northern Trust's latest Global Economic Research, Paul Kasriel writes why the National Bureau of Economic Research will most likely be declaring a recession in the U.S. with a delay:

... the NBER looks to the behavior of four variables to determine business cycle peaks and troughs: nonfarm payrolls, industrial production, real personal income less transfer payments, and real business sales... All four variables are down from recent peaks... Because these data get revised many times – because only time will tell if the recent apparent peaks in these variables are, in fact, actual peaks – the NBER is likely not to tell us the economy entered a recession in late 2007 or early 2008 until the economic recovery has begun... Our bet is that the U.S. economy has entered a recession.

Pointing out households' historically high leverage rates, Kasriel explains why this recession, unlike the 2001 recession, will be characterized by a retrenchment in household spending:

From 1956 through 1998, households ran surpluses. In 1999, they ran a small deficit, in 2000, a small surplus and from 2001 through 2007, deficits – and very large deficits at that in 2004, 2005 and 2006. Why did households start running deficits in recent years? A lot had to do with the low interest rate structure... [also] households were big net sellers of corporate equities in 2001, 2006 and 2007. By the way, principal net buyers of these corporate equities were corporations themselves.

Well, the party is ending. Home prices are falling, home foreclosures are soaring and mortgage lenders are requiring more than a pulse in order to qualify for a loan. So, household borrowing will be less available to fund household spending. And with corporate profits now contracting and corporate borrowing costs rising, the pace of corporate share buybacks and leveraged buyouts will slow, eroding another funding source of household deficits. Meanwhile, households are now experiencing their highest leverage ratios in the post-WII period [see chart below] and near their lowest liquidity ratios. We repeat, this recession will be characterized by a retrenchment in household spending.

click to enlarge

Source: Paul Kasriel: Why Households Are Behind This Recession