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Where Is The Money Coming From To Fuel Spending?
From The Daily Capitalist
It is a curious phenomenon that consumers are increasing spending in light of high unemployment and declining wages. How can that be? Have consumers just decided that the recession is over and life will be just like it was before?
Let's get the facts on the table regarding wealth, savings, earnings, and spending:
- Personal Consumption Expenditures increased 0.3% in February. Retailers had a good month.
- Unemployment (U-3) remains high at 9.7% nationally. Jobless claims keep rising: 24 states had rising rates, 9 had no change, and 17 had declining rates in last Friday's report. Note that the Washington DC corridor had wage gains.
- Private jobs are declining (-23,000) per the ADP report which is at odds with the BLS report.
- Wages keep declining. Real average hourly earnings for all employees fell 0.2 % from February to March. There was a 0.3-% increase in the average work week offsetting the decrease in real average hourly earnings.
- We also know that consumer credit continues to contract, a -4.0% decline YoY.
- About 51% of American households own stock, which which represents 36% of all equity holdings and 62% of all mutual fund holdings (2008). The rise in the stock market does create a wealth effect which makes people feel financially more secure. They were massive net sellers in 2008 (-55%).
- But, household net worth was up $2.8 trillion over 2008, about 5.4%, but it is still down about $11 trillion from the 2007 peak and now below 2005. The biggest drag was declining real estate values and declining equity in homes.
- Household debt measured by debt service payments as a percent of disposable personal income has declined from a peak of almost 14% to about 12.6%.
- As of Q4, household equity was 43.6% up from the record low of 40.8% in 2008, but below post-WWII levels. Part of the increase was due to a reduction in mortgage debt (defaults and pay-downs) not rising home prices.
- Foreclosure filings in the U.S. rose 16% YoY in Q1, and homes seized by lenders rose 35% YoY according to the latest RealtyTrac report. Auctions increased 21% YoY. They expect 1 million seizures and 4 million foreclosure filings this year.
- The Reuters/University of Michigan preliminary consumer confidence index of dropped to 69.5 in April from 73.6 in March.
- Personal savings has declined to about 3.2% down from a high of 6.4% in May, 2009. But savings has been declining since the early 1980s (about 12% then). Savings declined to an all-time low of less than 2% during the Dot Bomb crash.
To put this data into perspective, consumers are fearful about the future, unemployment remains very high, wages are declining and there is no way wages will increase any time soon, the home ATM is closed, consumers and small businesses can't get credit, and foreclosures are on the rise. While the stock market has gone up, household net worth is now back to pre-2005 levels.
So what is driving spending? Two things.
First is that consumers are drawing down savings to spend. Flat income growth caused consumers to tap into their savings to finance purchases of goods and services. If savings are a main motivation of consumers, especially with the wealthiest consumers (Boomers of retirement age), and since wages are flat to declining, then a reduction in savings to fund consumer purchases is not a good thing for the economy. It means that as soon as consumers feel they have sufficient income to continue to save, they will do so, and PCE (personal consumption expenditures) will remain flat for an extended period of time. The fact that they are dipping into savings is not healthy organic growth of PCE.
Second is the cash that is available to those consumers who have ceased paying their mortgage. Since foreclosures are at record levels, and since home owners understand there is no reason to pay their mortgage if they are going to lose their house, this frees up a significant amount of cash for PCE. David Rosenberg of Gluskin Sheff has estimated the effect to be $190 billion over time. While we can argue about his numbers, it doesn't represent a permanent source of income to fuel spending.
You may conclude that these factors are transitory, and that since long term economic trends favor saving over spending, PCE is systemically weak.
Further it appears that wage growth will remain stagnant. With such high unemployment there will be no pressure on employers to raise wages to attract workers. The economy needs to create 12 million jobs to recover to pre-recession levels. This may take three to five years depending on whom you listen to.
It appears that the economy has permanently changed and that consumer spending will not reach its former 70% share of GDP. If it does then that will be because GDP is shrinking in response to deflationary pressures, not economic growth.
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WTF ... How do we fit this into the scenario? Are the business people that buy these ads as stupid as the American consumer? Is everyone in the nation gone bonkers?
April 20 (Bloomberg) -- Yahoo! Inc., owner of the second- ranked U.S. Internet search engine, reported profit that topped analysts’ estimates, bolstered by a rebounding online advertising market and the sale of its Zimbra business.
First-quarter net income attributable to Yahoo more than doubled to $310.2 million, or 22 cents a share, from $117.6 million, or 8 cents, a year earlier, the company said today in a statement. Analysts in a Bloomberg survey had estimated 9 cents per share on average.
Advertisers are seeking out more space on Yahoo’s pages as the economy improves. The U.S. online advertising market will grow 13 percent this year, outpacing the 3 percent expected for total ad sales, according to Magna Global, a unit of Interpublic Group of Cos., the second-largest U.S. owner of ad agencies. That’s benefiting Yahoo, even as it remains a distant second to Google Inc. in search customers.
M3 (per Shadow Statistics, because our government no longer considers it important) is declining year-over-year at the end of March 2010 by about 3.65%. The difference between M2 (which is still slightly increasing over the same period, but has also dramatically declined, by 1.45%) and M3 is the following:
(1) large-denominated time deposits, (2) institutional money market fund shares, (3) term repos, and (4) term Eurodollars.
That seemingly paltry decline is the largest decline recorded for M3 year-over-year (i.e., since recording of M3 began in 1970). I don't believe we have ever not economically contracted after M3 went negative (also, remember that tax receipts have been trending down too). Anyway, M3 is telling us that over the last few months money has been flowing out of large accounts, not just small ones. Where is that money going?
My educated guess is that it depends on the who (and ignore your average Zero Hedger for the moment). For the wealthy with jobs, a good deal is flowing into equities. For the middle class, it really depends on: (A) whether you own your home, (B) have a mortage and are paying, or (C) have a mortgage and are not paying but vacationing at the moment. If you have a home and it's paid free-and-clear (and you are employed), then your consumption and savings patterns may have not changed much, but the closer you are to a strategic mortgage defaulter the more likely you are pumping up the consumption numbers, and even house sales (i.e., assuming you have a job). On balance there must be something to Econophile's and others' point that the lack of mortgage payment on balance is providing a temporary shot in the arm to consumption. Never fear, this will evaporate by the Fall.
we are following the Oct and Jan moves exactly. expect a re-visit to 1212-1213 before a good selloff down to 1150 range at least. it could go as far as the 1045 bottom from Feb.
From: America’s Recovery Is a Rotten Sham By: Justice_Litle | Apr 20,2010
More evidence has arisen that the "strategic default" consumer spending thesis is correct - and that the economic recovery on the whole is based on a rotten sham.
The economic "recovery" we are now witnessing is based on theft, greed and deceit. It's a giant rip-off, a rotten sham. In this sleazy imitation of a free market economy, liars, cheats and deadbeats are the ones getting rewarded.
And as for the savers, the hard workers, the ones who chose to honor their debts and live within their means? Nothing but a bunch of suckers. (They're the ones paying for it all.)
If you're one of those "suckers," at least you've got company. I'm a sucker too. ...
Apologies for my cranky tone today. I hope I'm not messing up your Monday. It's just that, heading into the weekend, I read something that absolutely made me sick. More on that in a moment...
Two weeks ago your humble editor asked, "Did the Housing Bust Fuel the Consumer Spending Binge?" In that piece, it was explained step by step how the phenomenon of "strategic defaults," i.e. homeowners walking away from their mortgages, may have fueled a surge in retail spending by way of freeing up cash.
As it turns out, it looks like the strategic default thesis was correct. And this helps show why those who were expecting a "new normal" got it wrong.
See, guys like Mohamed El-Erian at Pimco (and yours truly) at first thought the "new normal" meant consumers tightening up and living within their means. What we failed to realize is that "new normal" actually translated to "NO MORALS," as in "deadbeats ripping off the banks with abandon" (while the banks in turn screw the taxpayers).
In the piece two weeks ago, I hat-tipped a blog called Credit Writedowns for helping me solve the strategic default puzzle. The main blogger there, Edward Harrison, continues to do solid investigative work. Below are some of the anecdotes he recently reported (underscore emphasis mine). After reading them, I think you'll understand my mood:
· My 25 year old niece had $10,000 of outstanding credit card debt. Recently, she told the bank she couldn't pay. She is not unemployed so the 'hardship' is all relative. Nevertheless, the bank offered her a concession which she refused. They offered another concession, she refused again. Finally, they told her if she paid $150/month for 2 years (total of only $3600 with no interest), they would call it paid in full! She accepted in a heartbeat. It is less than a month later, and she celebrated her good fortune by going on a cruise to Hawaii.
· A friend owns a small manufacturing co. He tells me of one of his female employees who was saddled with a $450,000 home she purchased almost five years ago with no down pmt. One year after her purchase she pulled $75,000 home equity and purchased 'fun stuff' including a boat. She recently walked away from the house (now saddled with $525K mortgage), purchased a new house for $200,000 (in her sister's name) and kept all the goodies purchased from the home equity withdrawal. With the much lower mortgage payment she just bought a new car.
· Almost everyone in my "survey" is aware of, or knows someone living rent free in their home for an extended period of time, having stopped paying their mortgage. Many of these free boarders are spending lavishly on non-essentials. My hard-working part-time assistant knows two different 35+ yr olds who have enjoyed over 9 months (one is up to month eleven) of rent-free living in very nice homes they purchased in 2004/2005! Both are employed and both enjoy a non-frugal lifestyle. My assistant wonders if he should do the same or have me pay him more so that he too can enjoy the 'good life'.
· My sister is a nurse with 25+ years on the job. She told me of a young couple that she is good friends with that both work at her hospital making a decent joint income. They didn't like the fact that they grossly overpaid for their 3000 sq ft home in 2006. They stopped making hefty monthly payments six months ago and haven't yet been contacted by the bank. They have decided to wait until contacted and then walk away. In the meantime, they just returned from NYC from a week vacation in the Big Apple.
· My brother-in-law wanted to know if he should stop making payments on everything. He lives in Virginia and his carpentry skills are not as marketable as they were in the height of the boom. He and his wife's best friend have lived close-by for many years. For the past 13 months since they strategically decided to stop paying their mortgage, they had yet to be contacted by their bank. Not even one letter! My brother-in-law doesn't understand how they get to pocket the mortgage and spend carefree, including a 10-day Caribbean vacation.
Apparently there are lots more anecdotes of this type - potentially "millions of similar stories across the country."
I thought I was about as cynical as I could get. I thought that, after the initial outrage of the bailouts, my anger was all but spent. But this makes me feel righteously ticked off all over again.
The Revolutionary Rip Off Machine
Why be furious? A few reasons (including a chart that shows the financial sector's profits as a percentage of all corporate profits in total).… Read more athttp://www.marketoracle.co.uk/Article18787.html
Really the only people who will pay in the end, are people who pay US taxes or hold US dollars. I am leavin out money tied up in SS at this point because I consider it gone.
Your fate is not tied directly to the US unless you want it to be. Those who have the means already have some type of exit plan. Multiple countries, multiple currencies. If it gets bad just leave until it blows over. Many did this during the great depression, especially moving money to France before the market finally crashed. It can work, you just need to be creative, be on your toes and act.
Mark Beck
I can tell the same stories, but you did such a good job, no need to repeat.
I will add that some of these folks will end up owning these defaulted on properties outright, as the banks do abandon their claim on certain properties..
+1
Breathe in, breathe out...default. And then keep squirreling away supplies for the harsh winter.
The burden of systemic costs, if large enough, will effect growth. The framework no longer exits which can absorb this abuse and still be explained away through text book economics.
When do government costs effect output? Much of these are considered transparent to economists and congressman, they dismiss the effects as transitory. This is a mistake. Perhaps you can hide the real costs from the public at large, but not from large investors in sovereign debt. A simple spread sheet would show the risks in long term US sovereign debt.
At this point failure is baked in.
The shift towards the short side of Treasuires will continue. At some point the churn interest rate sensitivity will force some capital to exit. The movement in rates to attract buyers would be the logical approach. However, the FED may prolong the stall if QE is used to keeps rates low enough to just spill across the markets. So the strategy could get interesting, but it is only a stall until austerity.
What is clear is that the risks involved substantially increase volativity. You could see this on Ben's face during his presentation in front of the Legislative committee. Meaning, if the market turns against him, QE is his only and last move. I got the feeling he has perhaps up to six months of slack available for manipulating Treasuries.
Mark Beck
The chain store sales index went from near recession lows from mid-January
to late February, then promptly escalated rapidly to new high levels in March
and that increase continues now though it's plateaued for the last three weeks.
The rapid increase from late February to April coincides almost directly with
the timing of govt refund checks. The late Feb and very early March period
there may have been some pent up demand from the snow storms, but the
big increase in March has to be do to refund checks. Even hiring 300k workers
wouldn't explain that rapid sudden increase in spending; it wouldn't be enough. Sales for
March also benefitted a bit from the change in the Easter Holiday from
the year before. The idea that people not paying their mortgages could have
affected the very sudden increase in spending holds very little to no merit, as the
increase in spending for this reason would be much more gradual. I think it's
kept spending levels up over the past year a bit more than it would have
been otherwise, however.
Companies like Cap One and others have started to spam credit card offers again. I have gotten two in the last week. 18.9% LOL
Idle cash sitting in money market funds, earning some fraction of 1% is another resource being tapped.... per the Lipper data...
Mutual fund flows for the week ending 4/14/2010 :
Money Market funds net outflow of - $ 36 Billion
Bond funds net inflow of + $ 8 Billion
Equity funds net inflow of + $ 1 Billion
It's been shown consumers are using mm accounts (savings) to stay afloat, buying food and basics. Big spending employed people who already declared "stategic default" in their minds, many not paying mortgage for at least 6 months, are taking vacations, splurging but eventually these squatters will have to pay rent again.
http://www.financialarmageddon.com/2010/04/more-about-that-healthy-consu...
It's coming from government spending.
I'm going to say something very unpopular here: the Keynesians were right. Those who say that the only way to have money supply is for the government to run a deficit are correct. It's an artifact of debt-based money, and the fact that private debt must eventually extinguish or default.
Permanent money supply is only achievable with perpetually growing government deficits. This is why our debt figures are blowing out. Private credit creation is in the process of reversing, leading to payoffs and liquidations and assorted deleveraging. This is the deflationary trend we all see. However, the interest claims levied upon the money supply at some point will be greater than the money supply itself as creditmoney vaporizes due to default or payoff. Consequently, government must take up the slack and grow geometrically.
I'm not advocating this system...it's total bullshit, but the math of it makes these deficits inevitable or else the money supply would actually completely vanish in a deflationary implosion.
You need to breakdown the MEDIAN household's ownership of stocks, I think I read 10% of Americans (the richest) own 80% of stocks (equities, if you're lucky) This info is highly bogus and repeated all too often, ad nauseum.
ORSA - Think big - take the whole family to Olive Garden. Nachos hell.
So let's see if I've got this straight. SOme dude is too flat-assed broke to pay his mortgage, but he frees up $500 or so extra per month by mailing in the key. Let's go eat nachoes!
The Oakland Press today has a story about a tax protestor who was sentenced to 3 years in prison for failure to pay. For every person like this who refuses on principle there are a few hundred who quietly reach the point that taxation feels the same as confiscation.
Not wishing a Federally managed vacation they simply cheat on their taxes at every opportunity. Again - for every person who works totally off the clock and under the table there are a hundred skimming 5% or 10%. Once they would have been turned in by others indignant at the cheating. Today the gubbamint is held in such contempt a fellow told me he wouldn't turn a tax cheater in if he knew one because he was sure the government would cheat him out of the reward they promise.
Those gray-market, black-market, under the table incomes do get spent on legitimate goods driving sales up.
Americans are just learning what the peasants in third world hell holes have known for generations - how to hide their grain and pigs when the King's men come around.
An interesting study is to review the decline of Rome.
The political class became the feudal lords due to taxation policies. Many couldn't afford to pay the property taxes and ended up selling themselves into serfdom to seek sanctuary under a political class member who could make "arrangements" with the taxmen. This trend ran for many decades and ended up with a consolidation of land into massive holdings, the precursors to feudal duchies in the middle ages.
Forced production quotas (taxes) ended up making people into serfs. It was simply too expensive to hold the land.
That appears to be the goal of these elites, to destroy the middle class through "socialism" policies which are really fascist. I guess this is how after 100 years, the european nobility is not only still around but still lounging in chateaus and driving Bentleys.
tax refunbds/strategic defaults/bad census data (sampling error) due to the huge number of mom and pop stores closing down.
Simple explanation - the census bureau canvasses large stores that have picked up market share from the tons of small stores that have gone out of business. As the large stores pick up share, it appears that total spending is rising because the census bureau doesn't adequately adjust for the small businesses. It's the reason why income, employment, and debt can fall while the appearance of higher spending is believed.
Makes a lot of sense. It's not the economy, it's the measurement methodology. Ask the rich how it's going, and they probably all say "fantastic!"
I worry about the permanently jobless I see around me, and how they are surviving. I think there are islands in this recession-ocean, and it is easy to skip over the watery parts and head for land when that is all you are looking for.
It's worse than that.
I know a guy who was in a senior position in the Clitton WH. He's now a lobbyist. During 2008 he said and I quote "I just don't see an economic crisis. All the people I know are full-speed ahead." We went to his $10M house for a party, which he had just built custom. Pool, waterfall, 3 stories, basically a freaking mansion in the highest-rent geographical location around DC.
The richer you are, the better you're doing. I imagine that the HC bill and TARP and all the rest of this has been a HUGE boon to those whose business it is to steer money and legislation and peddle influence. Anyone sucking off the gov't tit is fantastically rich and getting richer.
From what I see im my daily routines, the higher consumer spending isn't a government statistical fluke. Stores, parking lots, and roads are more crowded than last year at this time. The obvious question is how long can it continue?
Declines in state sales taxes and DOT vehicle miles driven, not to mention refining deliveries don't match your observations.
Good grief Charlie Brown.
Has anyone heard of the underground economy? The policy wonks and economists think they can read a few reports and know what's happening.
As the Chinese say - It's a big country and the emporer is far away.
We easily forget that this is a very wealthy nation and it will take some time for wealth to be destroyed to the extent that the majority will feel it. It is all breaking down slowly and steadily and will continued to be sucked down the black hole the the banks and government has graciously created for our collected benefit! I am more concerned with what I am going to do about it than what others may or may not choose to do. Survival instincts have kicked in. Hope to see many here on the other side of all of this. This will not end well so make a very good plan and stick to it. It is the three little pigs story, kiddies, so who is building their house of gold colored tungsten?
Those of us who are "saving" are really only providing a stash to be raided by the government to redistribute to those who will spend it, so it is a futile effort.
I'm sure that there are families out there that have found themselves running a surplus due to the fact that they have quit paying their mortgage. There are also some who have negotiated the balance of their credit cards (and all other debt) way down thus lowering their monthly payment. People who are very capable of paying their debts are using this financial crisis as an excuse to fraudulantly get their debt levels reduced or even eliminate all together.
The consumer is in fact in the process of depleting any or all of their alternative sources of funds such as a selling a stock, savings accounts, mutual accounts and I would be real curious to see if their 401K's are currently being depleted. This may very well be the catalyst to the next leg down, because the US savings is a VERY limited source of spendable funds.
Remember that the a high percentage of the homes that have been foreclosed on were loans that the mortgage holder had VERY little to NO money of his own in the deal. So when this deadbeat defuncts on his loan does he really loose anything? The negative financial impact on this person is negligible. Now Obama is even going to pay them to walk away from their mortgage. What has occurred as a result of this is that this buyer is now renting for far less then what his mortgage payment was, which is additional spending money for this family.
I often wonder how the next generation of adults (say kids that are 12 to 16 years old) will treat their future debt obligations. I bet you they will in fact gorge on debt themselves and likewise they will default without even thinking twice about the prior commitment they made to pay.
I know of no other time in the US history when the American debtor has been so blatant in telling the lenders to get screwed.
CC renegotiation = default = "found money"
I too wonder about 401k drawdowns, and how many boomers are thinking about moving in with their kids but don't realize the kids have also defaulted on their mortgage.
"The consumer is in fact in the process of depleting any or all of their alternative sources of funds such as a selling a stock, savings accounts, mutual accounts and I would be real curious to see if their 401K's are currently being depleted."
If widespread liquidation was in fact happening, how do you explain the increases in equity prices?
The equities market is increasing due to institutional money. That's also been a big question many of us have had. There is clear data that shows the US consumer has liquidated their equities. This selling, along with the money market accounts decreases have led to huge bond fund increases. But there is a fairly substantial difference of the balance of money market funds being liquidated vs bond funds being purchased. This difference is thought to be going to spending.
Here is my theory to explain increasing PCE while overall consumer credit contracts. When the banks were teetering on the brink in '08, millions of households withdrew cash and stashed it away, just in case. Now that the "all clear" is sounded, that cash is being spent at retail outlets.
Can you say: "austerity"
Don't forget the government payments to individuals as well.
With a large amount of people on unemployment (and being extended), they are FORCED to spend on daily expenditures. Unemployed people have a higher propensity to consume, and no real ability to save.
I would agree with this if people were forgoing savings to buy milk, eggs and Cheerios, but I don't think the argument is valid when iPads and 55" 3D televisions are selling out.
Fools and their money ...
But,
1. 83% of the population is working.
2. The numbers don't bear you out. Spending is very weak.
3. My brother just bought one of those 3D TVs and he's an idiot.
My observations are that the number of people (like ZH readers) that really know what's going on are a small fraction of the overall population. Most people I interact if, who are mostly highly-educated, professional people, think that "things will always work out" and the "future will be better than the past". In other words, they think that the past two years was a once-in-a-generation hiccup so why make fundamental changes to behavior?
I totally agree. I also know folks like too. Yet, despite their very good middle class incomes, they have a lot of stuff, but no savings and bad debt. Don't judge a book by it's cover.
Read (or listen to.. ) 'The Millionaire Next Door'
King World News Interview on this subject with Mark Hanson:
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/4/16_Mark_Hanson.html
There is also the small matter of inheritance. As people lived longer and longer the pass of inherited wealth was delayed. But since no one lives forever the later WWII and Korean War generation are finally dying in droves and their heirs are getting that wealth.
I checked out the numbers on this recently and the percentage of Boomers inheriting money is very small and on average less than $25,000. Guess what Mom needs the money to pay for the nursing home. Better to salt it away yourself. I'll see if I can find these numbers.
Bankruptcies & folks simply walking away from unsecured debt is increasing disposable income. So do the economy a favor: tell Chase & Co. to shove it.
Let's not forget the effect of the tax rebates - a check from the government is like free money, so people spend it..
Joe Q?
Is he John Q's brother?
This Bungee cord economy hit bottom last year..now we get a bounce but impossible to reach the jump off point of 07..
Gov keeps pumping into banks and adding debt
Stocks move up..creation of wealth ..but with
Socialism the money multiplier is skewed and
$ spent now equals -50 cents.(d/t debt service)
MSM and Gov reports will remain positive even as we hit 20% UE..we are near the point where UE hits bottom as a minimum number of jobs
are required in this black hole economy.
then another drop back into the hole as momentum of debt service and lack of job creation (ex gov) pulls us lower ... The UE number then drops again to some minimum level (25%?)to sustain a socialist economy.
and repeat above until CWII or
The only way out is a bitter pill for keynesian socialist groupies -- tax reduction across the board..and the default on debt.
Dont forget tax refunds were up 10% and were accelerated by several months most of which were dispersed in March. Looking at the last 2 weeks of redbook retails stats it clearly shows that since March retail sales have been cooling.
^This
Making Work Pay, a tax benefit for anyone reporting even a small amount of income (believe me, I know) provided between $100 - $400 stimulus to each employed person this year. Add to that the EIC tax credits, and you're starting to talk some real money. This was reflected during tax return season, the time when most wage earners get their annual 'bonus'. This effect should peak in March, and fall off in April.
Well you have all obviously missed the recent magazine covers that EVERYTHING IS FINE!
Newsweek: America's BACK!
The Economist: Hope at Last
Business Week: The Hot Hand
These are signs of a top. To quote Steve Hochberg: "according to Paul Macrae Montgomery's Magazine Cover Indicator (MontgomeryCap.com), when financial trends have been so strong (or lasted so long) that they reach the cover of popular news magazines—and to a somewhat lesser degree, the cover of weekly financial magazines—the odds are that the trend in force has saturated society to the point where it is nearing exhaustion."
And with Joe Q reading these covers at the checkout line buying the Cheeze Whiz--just as the first leg down showed the US burning to the ground in the first quarter of '09--he/she pull out the credit card and get a better TV, couch, and buy the latest Apple gadget since we all know, only possessions bring deep lasting happiness. And of course that scuba gear mortgage will be fine...right.
They're buying Cheez Whiz because they can't afford anything else.