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Consumer Spending and the Debt Problem
This article originally appeared in The Daily Capitalist.
It seems like we're having great news about consumer spending, at least if you read the articles coming from the Journal and Bloomberg. They don't let you forget that consumer spending is 70% of the economy. They seem to ignore some of the basics of economics. If, according to them and their economist prognosticators, all we had to do is spend, spend, spend to recover then we should stop saving, pile up more debt, and spend. Butt doesn't work that way.
But first, the numbers. Here's a table which explains most of the data:
Here are the accompanying charts in real (inflation adjusted) numbers:
While this is the eighth straight month of spending gains, things seem to be flattening a bit if one looks at the yearly trends.
Here are some of the details (from Econoday):
For the latest month, consumers went on a bit of a spending spree-although a big part of it was on autos and gasoline. Income also was up nicely though an important issue is that it lagged inflation. Personal income in February advanced 0.3 percent, following a 1.2 percent advance the prior month. February's number fell short of analysts' forecast for 0.4 percent. Wages & salaries gained a moderately healthy 0.3 percent, matching the rise in January.
Again, consumer spending in February was led by auto sales and higher gasoline prices. Personal consumption expenditures jumped 0.7 percent, following a 0.3 percent rise in January. The latest figure beat the median forecast for a 0.6 percent gain.
For PCEs in February, strength was led by durables, up 1.6 percent, after a 0.3 percent rise in January. For the latest month, nondurables (includes gasoline) jumped 1.4 percent, following a 1.0 percent rise in January. Services spending nudged up 0.2 percent after no change the month before. Despite some erosion from inflation, real purchases were up as chained dollar purchases advanced 0.3 percent in February after no change the prior month.
On the inflation front, the PCE price index increased a notably warm 0.4 percent, topping the 0.3 percent boost in January. The core rate gained 0.2 percent in February, matching the prior month's pace and equaling expectations. On a year-ago basis, headline PCE prices are up 1.6 percent in February-up notably from 1.2 percent the month before. Core inflation nudged up to a 0.9 percent year-on-year pace versus 0.8 percent in January.
Year on year, personal income for February was up 5.1 percent, compared to 4.9 percent in January. PCEs growth improved to 4.1 percent from 3.9 percent the month before.
Actually real disposable income (chained 2005 dollars) declined 0.1%. Real PCE was only up 0.3%. One thing to note is that government transfer payments were up 1.1% in February, as opposed to a 0.1% decline in January, which makes February look even better.
The headline seems to be that despite high gasoline prices, spending is increasing, but that right now it is rather tepid. If you compare real numbers to nominal numbers, inflation is a substantial part of it. What high oil prices tell me is that demand for gasoline is still strong. Whether such demand will remain high without affecting consumer spending patterns is another matter. In light of consumer savings and debt load patterns, I think it will have to negatively impact spending.
Savings continue to remain at a higher levels, at 5.8%, although down from 6.1% in the prior month. It is my belief that PCE gains for the average American is coming at the expense of savings.
While savings appear to be declining, I do not believe it is because consumers think things are getting better; more likely it is because income growth is weak and personal debt is high. In light of this, we need to look carefully at consumer debt trends.
First of all, as a percentage of disposable income, debt service has declined. Why is this important? High debt service is a drag on the consumer. But why has it been going down when wages have been flat? There are two factors at play here: the debt level and the interest rate. Interest rates are still low, relatively speaking, and this shows up as a partial explanation for a decline in debt service as a percentage of disposable income:
One need not guess how rising interest rates would impact consumers in an inflationary environment.
This next chart shows that consumer credit has been shrinking since the October 2008 crash. Only recently has consumer credit been growing slightly and that has largely been a result of automobile purchases (nonrevolving credit) and student loans. But the total amount of debt as shown by this chart below has only declined by about $175 billion, not a large amount considering the rapid growth in debt since 2001.
The real story of this chart is the high level of debt. If we just focus on the last three years, we get a skewed sense of the data. But since the 2001 recession, consumers added $800 billion in consumer debt (i.e., doesn't include mortgage debt), about a 44% increase in seven years. Total household debt (consumer and mortgage debt) grew from $7,659 trillion, or 75% of GDP ($10,205.6) in 2001 to $13,803 trillion, or 95% of GDP ($14,061.8) in 2007. (All numbers come from latest NIPA tables.)
This is a problem. Consumers will continue to shed debt, not just by walking away from mortgages on underwater homes, but by paying down their consumer debt. As David Stockman pointed out in his article today, 78 million Boomers are headed toward retirement and it is unlikely that they will take on more debt. Stockman raises the obvious question: where has the post-crash increase in spending been coming from? His answer: government transfer payments of about $500 million. I would add to that spending from upper tier of income earners, the ones who are driving "luxury" goods sales as noted in the sales reports, plus the draw down in savings by average consumers. Regardless, we know how the $500 million was paid for: federal deficit spending and consequent borrowing.
If the near and distant future is fiscal sanity by Boomers, then where is consumer spending coming from? Will it be from the younger generations who continue to pile up student loans? It depends, but not likely in the near term and they struggle with debt. How long can we assume that the government will continue to fund deficit spending at the expense of future generations? My guess is: not long. We are heading toward fiscal crisis unless the Republicans can tame federal spending. And unless savings continue to grow and household debt service is substantially reduced, we have a problem with long-term economic growth in America.
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Moral hazard is blooming.
What happens when the rule of law is rescinded for the sake of the politicians and the banksters?
Why...the populace learns the trick faster than you any wankster can believe!
Ben, Hank, Alan, Timmy, Jamie, Lloyd - the hemp beckons...
So tell us how much did the banksters charge for setting up the home equity loan? Thats profits for the bank which they already have and dont really care about anything else. Same for fat commission annuities, reverse mortgages and securitized mortgages. Lesson is banks are greedy and consumers should live within their means and never use their house as a bank. Because American economy is no longer growing and creating wealth, it is redistributing remaining wealth through banking and global financial system until default time when we are all screwed.
This is looking good. As soon as we hit consumer spending == 100% of the economy we will all be living as ladies and gentlemen of leisure in a consumers' utopia of plenty!
It's the post industrial worker's paradise I tells ya. We'll all be employed as consultants.
I don't need charts to tell me that once home equity loans are terminated as a source of money which drives spending like drunken sailors , consumer spending will drop.
A new iPad is much more important then paying a mortgage, isn't it?
Seriously, though, I see more and more wealthier people now defaulting since they see no adverse consequences. Wall Street, Hank Paulson's Bailouts, Timmy, Bernank, Greenspam have altered the Nation's value system forever ...and not for the better many say.
Funny I thought I just heard that Hank, Timmy, Ben & Alan LOVE their new iPad 2!
Moreover, in certain states like California & Nevada (especially Clark County) people prefer purchasing iPads 3 to 1 over paying their mortgages - Now if there were only an Apple App that would allow instant access to becoming a Primary Dealer -
this is not a huge crisis - this is just the way FIAT currencies work -
up > up > up > up > up > up > CRASH ... up > up > up > up > up > up > CRASH ... up > up > up > up > up > up > CRASH
Its just time for a CRASH. That's all. Like a game of hot potato. Every few decades, the buzzer goes off and anyone caught off guard gets destroyed. Too bad so sad ;(
If you've got debt, you get wiped out. If you've saved cash, you'll live to play again.
Why is everyone so upset about all of this? Just hold cash and go short and start buying gold and silver on the EXTREMELY REMOTE chance the FED decides to take the poison pill.
That's the price we must all pay for enjoying the benefits of central banking.
beinger herded to slaughter is a benefit?
Doubtful spending will come from the 20-somethings when half of them live at home and are either un- or underemployed.
"unless the Republicans can tame federal spending" - FAIL
It's not's up to one party or the other to cut spending at these levels, it's up to Congress as a whole. Unlikely to happen in any case.
It will happen.
DO WHAT GREECE DID!!!
They introduced A TAX on SODA CANS!!
BRILLIANT!!!
that clears the first few million, now what about those billions and trillions....
Perfect time to crash the value of their houses. Including those who have any equity left.
rocker,
newsflash, I set up a HE Loan in case I ever wanted to use it.Never intended to use it.Blessed that I looked ahead,and just set it up IN CASE.
However, my HE Loan is set up to where I can get 60% of my THEN appraised value, at a set rate, and they MUST give me the loan.It's been paid for over ten years, but homes are fast becoming money pits.
IF the SHTF, I refuse to get screwed further, I gave both Senators, and my Rep hell yesterday.My words were not kind, and they were very direct.
If they crash the value, I will take the HE Loan out, and walk it.Leave the key's wid them.
Sick and tired of doing the right thing and getting the Bawney Fwank socked to ALL of us, that play by the rules,never broke a law, and believed in my country.
About time I was the PITCHER.