C O N S U M E R  S E N T I M E N T / D E B T

Never underestimate the importance of people spending money.  That is why the general mood of consumers means so much.  Some people made fun of President George W. Bush when he told everyone to just "go shopping" after the 9/11 terrorist attacks, but that is the single most important thing he could have said to Americans at that time.   Recessions usually start when an event happens that causes people to stop spending money.  Take the granddaddy of them all, the Great Depression.  The Great Depression was triggered by the stock market crash of October 1929.  In short, people freaked out and cash stopped flowing.


This hasn't been an issue in America for a while now.  In fact, consumer spending has been driving growth in GDP like crazy.  According to the Federal Reserve Bank of St. Louis, personal consumption expenditures (i.e. consumer spending) "has contributed 74.9 percent of overall economic growth during this cycle so far, a share exceeded in only two other cycles."  That was written two years ago and consumer spending has only strengthened. 

 

"The combination of weak overall GDP growth and strong contributions by both residential investment and consumer spending mark the defining characteristic of the current business cycle: Household-related spending is driving the economy like never before. Fully five-sixths, or 83 percent, of total growth since the economy began to recover in 2009 has been fueled by household spending.  Hence, the continuation of the current expansion may depend largely on the strength of U.S. households."   Read the entire report here.

In four major indexes that measure consumer confidence – the University of Michigan’s consumer sentiment survey, the Conference Board’s consumer confidence index, the Bloomberg Consumer Comfort Index, and the Organization for Economic Cooperation and Development’s consumer confidence index – U.S. consumer confidence is high thanks to favorable job and income prospects.  

But here's the problem:  You live by consumer spending/confidence, you die by consumer spending/confidence.  American consumers cannot carry the burden of keeping the national economy afloat forever.  It's impossible.

 

According to the Federal Reserve District's January 2019 Beige Book – a publication about current economic conditions across the 12 Federal Reserve Districts – "outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty."  Read the entire report here.  This continued in July's report:  "The outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty."  Read the entire report here.  < However, the January 2020 report said that "expectations for the near-term outlook remained modestly favorable across the nation."  Read the entire report here. >

In any event, things are starting to happen.  Take car payments, for example.  In February 2019, the New York Fed reported this:  "Although rising overall delinquency rates remain below 2010 peak levels, there were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018. That is more than a million more troubled borrowers than there had been at the end of 2010 when the overall delinquency rates were at their worst since auto loans are now more prevalent. The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector."  Plus, it was reported in November 2019 that personal loans had increased 10% from the year prior, with an average balance of $16,259.  Personal loan balances over $30,000 have increased 15% in the past five years.

...and there could be additional problems on the horizon that could prevent people from continuing to spend. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All of this is now forcing people to spend money they don't have.  According to the Federal Reserve Bank of New York, "the Center for Microeconomic Data's (CMD) latest Quarterly Report on Household Debt and Credit reveals that total household debt increased by $92 billion, or 0.7 percent, to $13.95 trillion in the third quarter of 2019.  It was the twenty-first consecutive quarterly increase, and the total is now $1.3 trillion higher, in nominal terms, than the previous peak of $12.68 trillion in the third quarter of 2008."  Read the full report here.

$13.95 TRILLION!

In America, 78% of us live paycheck to paycheck, over 1 in 4 U.S. workers don't consistently put money into savings, and almost 3 in 4 American workers say they are in debt today, with half saying they will most likely always be.

A report by the Federal Reserve reveals that "if faced with an unexpected expense of $400,  27 percent would borrow or sell something to pay for the expense, and 12 percent would not be able to cover the expense at all."  Read the entire report here.

Reuters analysis of U.S. household data "shows that the bottom 60 percent of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened – a break with a decades-old trend where the top 40 percent had primarily fueled consumption growth...It is this recovery’s paradox.  A hot job market and other signs of economic health encourage rich and poor alike to spend more, but tepid wage growth for many middle-class and lower-income Americans means they need to dip into their savings and borrow more to do that.  As a result, over the past year signs of financial fragility have been multiplying, with credit card and auto loan delinquencies on the rise and savings plumbing their lowest since 2005."

"In the past, rising incomes of the upper 40 percent of earners have driven most of the consumption growth, but since 2016 consumer spending has been primarily fueled by a run-down in savings, mainly by the bottom 60 percent of earners," according to Oxford Economics.  "This reflects in part better access to credit for low-income borrowers late in the economic cycle.  Yet it is the first time in two decades that lower earners made a greater contribution to spending growth for two years in a row."

 

'It’s generally really hard for people to cut back on expenses, or on a certain lifestyle, especially when the context of the economy is actually really positive,' said Gregory Daco, Oxford’s chief U.S. economist.  'It’s essentially a weak core that makes the back of the economy a bit more susceptible to strains and potentially to breaking.'"

 

Evidence: 

William R. Emmons.  "Housing and Consumer Spending Are Powering the Economy like Never Before."  Federal Reserve Bank of St. Louis.  September
   2017.  
 

United States. Department of Labor.  "Consumer Price Index Summary - December 2019."  Bureau of Labor Statistics.  14 Jan 2020

United States.  Federal Reserve.  "The Beige Book: Summary of Commentary on Current Economic Conditions."  16 Jan 2019  

United States.  Federal Reserve.  "The Beige Book: Summary of Commentary on Current Economic Conditions."  17 July 2019  

United States.  Federal Reserve.  "The Beige Book: Summary of Commentary on Current Economic Conditions."  15 Jan 2020

Federal Reserve Bank of New York.  "Auto Loans in High Gear."  12 Feb 2019

Heather Long.  "Personal Loans are ‘Growing Like a Weed,’ a Potential Warning Sign for the U.S. Economy."  Washington Post. 21 Nov 2019

United States.  Department of Labor.  "Consumer Price Index Summary - June 2019."  11 July 2019

Federal Reserve Bank of New York.  "Quarterly Report On Household Debt And Credit: 2019 Q3."  Research and Statistics Group. November 2019

"Living Paycheck to Paycheck is a Way of Life for Majority of U.S. Workers, According to New CareerBuilder Survey."  CareerBuilder.com.  24 Aug 2017

Jonathan Spicer.  "Mortgage, Groupon and Card Debt: How the Bottom Half Bolsters U.S. Economy."  Reuters.  23 July 2018

United States.  Federal Reserve.  "Report on the Economic Well-Being of U.S. Households in 2018."  May 2019

Wages are growing slowly but, in the whole scheme of things, are still largely stagnant (read more here).

Consumer prices are increasing.  In January 2020, the Labor Department reported that "the all items index increased 2.3% for the 12 months ending December 2019, the largest 12-month increase since the period ending October 2018."

At the same time the cost to borrow money will likely increase.  In the wake of the 2007-2009 Financial Crisis, the Federal Reserve lowered interest rates to practically zero, and they have been stuck there for years.  Cheap money allowed businesses and consumers to spend money and, therefore, stimulate the economy.  As interest rates increase, however, there will be less money for consumers to buy homes, cars and other goods and services to fuel the overall economy.

And this will only get worse.  American consumers pay the tab for Donald Trump's trade war.   Although – FINALLY – someone in the Trump administration kind of admitted this fact.  After tough questions from host Chris Wallace, National Economic Council Director Larry Kudlow acknowledged that U.S. consumers, not China, pays the tariff bill.  On Fox News Sunday, Wallace pressed, "It’s not China that pays tariffs.  It’s the American importers, the American companies that pay what, in effect, is a tax increase and oftentimes passes it on to U.S. consumers.”  To which Kudlow replied, “Fair enough.”  Wallace kept pushing until Kudlow finally admitted that "no" China doesn't pay for the tariffs, but "the Chinese will suffer GDP losses and so forth with respect to a diminishing export market.” Which is also true but entirely different than Donald Trump's completely wrong assertion that China foots the bill for the tariffs. <Note:  We don't believe the Trump administration's preliminary "trade deal" with China is going to change anything at all.  Read more here. >

 

One study by economists Mary Amiti of the Federal Reserve Bank of New York, Stephen Redding of Princeton University and David Weinstein of Columbia University found that "the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018."  They also estimated "the cumulative deadweight welfare cost (reduction in real income) from the U.S. tariffs to be around $6.9 billion during the first 11 months of 2018, with an additional cost of $12.3 billion to domestic consumers and importers in the form of tariff revenue transferred to the government. The deadweight welfare costs alone reached $1.4 billion per month by November of 2018. The trade war also caused dramatic adjustments in international supply chains, as approximately $165 billion dollars of trade ($136 billion of imports and $29 billion of exports) is lost or redirected in 23 order to avoid the tariffs. We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters. We also find that U.S. producers responded to reduced import competition by raising their prices."  Read the entire report here.

 

Another study be equally smart people estimated "an annual loss (from the 2018 trade war) for the U.S. of $68.8 billion due to higher import prices.  Using a general equilibrium framework and the estimated elasticities, we compute gains of $21.6 billion from higher prices received by U.S. producers. The redistribution from buyers of foreign goods to U.S. producers and the government nets out to a negative effect of $7.8 billion on an annual basis for the U.S. economy (0.04% of GDP)."  Read the entire report here.

Aaron Flaaen of the Federal Reserve Board, and Ali Horta and Felix Tintelnot of the University of Chicago found that "in response to the 2018 tariffs on nearly all source countries, the price of washers rose by nearly 12 percent; the price of dryers –a complementary good not subject to tariffs – increased by an equivalent amount.  Factoring in the effect of dryers and price increases by domestic brands, our estimates for the 2018 tariffs on washers imply a tariff elasticity of consumer prices < i.e. tariff pass-through > of between 110 and 230 percent."  Read the entire report here.