- Economic data seem largely unchanged from past trends, despite uptick in retail sales.
- Consumers continued to pare their debt last quarter continuing a nearly five-year trend.
- Given consumer deleveraging, consumption remains tethered to income gains – and those gains remain sub-par.
Last week’s economic data give a very mixed picture of the health of the consumer. While the market seemed to cheer the uptick in spending seen in retail sales reported on Tuesday, the data on the whole looks largely unchanged from past trends. As it relates to the contribution of consumption in gross domestic product (GDP), we are still looking at growth near 2%. There was no “wealth effect” that I could discern. Retail sales rose just 0.2% in July, as auto sales weakened in the month. The proxy for Personal Consumption Expenditures (in GDP) rose 0.5%—decent, but revisions to prior months were downward. A bit more worrisome were the very weak results from housing-related spending (furniture, building materials, appliances), likely related to the softer housing activity seen recently and probably in response to the spike in interest rates seen in the second quarter. Some discretionary categories did well (restaurants, clothing, department stores) in July, but those had been very weak in prior months and were due for a bounce. Furthermore, based on retailer reports out this week, many are seeing a consumer still suffering some stress.
Overall, there is little to suggest any acceleration in consumer spending. We need to keep in mind that the consumer’s ability to advance spending is mainly tied to gains in income and wages this cycle—which have remained very sub-par. Consumer credit has had little impact on the current recovery. Over 90% of the current cycle consumption growth is explained by growth in incomes and wages, well north of the 60% historical correlation seen in the prior 25 years. After 1980, consumers’ access to credit was vastly expanded and this fueled consumer spending power well ahead of wage growth. Consumers used credit cards freely, and when these maxed out, used home equity lines of credit to continue their spending spree. Today we are still feeling the effects of deleveraging even though the bulk of the adjustments are behind us.
We are reminded of this by the recent Quarterly Report on Household Debt and Credit just issued this week by the New York Federal Reserve. Consumers continued to pare their debt last quarter continuing a nearly five-year trend. Overall household debt fell 0.7% ($78 billion) and is down 2% year over year, a decline consistent with past years. Mortgage debt fell too, down 1% ($90 billion) although some of this was due to foreclosures, write-offs and paydowns from sales—this is overwhelming any increase in balances from home purchases so far.Home equity lines of credit fell by $12 billion, falling a steady 8% annually.
On to the good news. There was a ninth consecutive increase in auto loans (up $20 billion and the largest quarterly rise since 2006), rising 8.5% in the last year. This is consistent with the healthy increases in auto sales in the last year, which has been a bright spot for manufacturing and a significant underpinning to economic growth overall. Credit card and student loan balances increased by $8 billion each. There is a definite steadying in credit card balances apparent with slight gains in three out of the last four quarters. But they are still falling slightly on a year-over-year basis (-0.6%). Growth in student loans is off the boil, with annual gains of 8% about half of last year. Delinquencies on all categories also fell in the quarter—a hopeful sign. But these remain quite high in student loans overall. The only piece of bad news related to increases in foreclosures and bankruptcies, the first rise in over a year.
With consumers still deleveraging their mortgage balances and only modestly advancing other loans and credit card debt, consumption gains remain tethered to income gains. Real Personal Income gains remain locked near 2% and so too will consumption growth until consumers regain their love for credit.