The expected drop in US consumer spending is likely to outweigh the impact of the Treasury's fiscal stimulus package hugely, warns David Rosenberg, economist at Merrill Lynch.

Last week's Federal Reserve flow of funds report showed US household net worth fell $1,700bn in the first quarter, the biggest decline outside the tech bubble, Mr Rosenberg says.

"But back in 2001 and 2002 it was strictly a stock market story and what we are seeing unfold today is asset deflation on two fronts, both residential real estate and equities, at a rate that is almost without precedent."

He says the ratio of household net worth to disposable income has fallen to a level which, if sustained, would be consistent with a rise in the personal savings rate to 2.5 per cent, leading to a drop in consumer spending of about $150bn.

Food and energy inflation is estimated to be draining discretionary spending by another $300bn annually and the contraction in the jobs market is crimping personal income by $125bn. Furthermore, the credit crunch has led to a fall in new household borrowings in the first quarter and this looks to have impinged on household cashflow by a further $200bn, he says. This adds up to a $775bn cut in cashflow, equal to a near 12 per cent hit on discretionary consumption.

"This swamps the fiscal stimulus by a factor of seven and is precisely what the peak-to-trough decline was in the 1973-75 consumer-led recession."