BofA Warns "Wealth Effect" Spending Muted, Consumers Cautious
Consumer spending was soft in July. BofA data shows retail sales ex autos, measured from spending on credit and debit cards, increased only 0.3% mom seasonally adjusted. This , BofA warns, sends a somewhat weak signal in advance of next week’s retail sales report. Crucially, while supply of credit is abundant, BofA's Michelle Meyer concludes demand is weak and this cautious consumer behavior suggests the positive effect on spending from wealth creation may be muted in this cycle.
As BofA writes,
The chart below shows that applications for credit cards are only up marginally from the recession lows and still significantly below the pre-crisis peak. Yet at the same time, the approval rate for credit cards has increased markedly. This suggests that slow recovery in credit card debt is more a story of weak demand than restricted supply.
This cautious consumer behavior suggests the positive effect on spending from wealth creation may be muted in this cycle. Households have been enjoying significant wealth creation, reflecting the gain in home prices and appreciation in equity markets. However, it seems that consumers have been hesitant to add more leverage and borrow against this wealth.
Furthermore, there has been a decline in the share of spending done with credit card users who carry a balance ("revolvers").
The shift toward more transactors, those who just use the credit card to transact and do not carry a balance or pay interest, is suggestive of a more conservative consumer.
And to make matters worse - The Fed's key policy transmission channel is broken...
Despite rising home prices, there has only been a marginal pickup in origination of home equity lines of credit (HELOCs).
Indeed, many homeowners with a mortgage are still in either negative or near-negative positions (according to CoreLogic, 12.7% and 3.2%, respectively) and hence do not have sufficient equity to withdraw.
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This all sends a somewhat weak signal in advance of next week’s retail sales report supposedly exuberant post-weather rebounds...
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