Sunday, 25 of June of 2017

Economics. Explained.  

Category » Consumer

Consumer Sentiment

June 16, 2017

The final estimate of consumer sentiment for June fell 2.6 points from 97.1 to 94.5. The 98.5 reading for January was the highest level of confidence thus far in the business cycle.  But consumers’ political affiliation has created an interesting divide between Republicans and Democrats.

Richard Curtin, the chief economist for the Surveys of Consumers, said “The modest early June drop of 2.6 points in the Sentiment Index masks a much larger decline since June 8th. Prior to that date the Sentiment Index had averaged 97.7, but since June 8th, the Index fell to 86.7, a decline of 11.0 points. While this break corresponds with James Comey’s testimony, only a few consumers spontaneously referred to him or his testimony when asked to explain their views. Importantly, the decline was observed across all political parties, but the loss in confidence among self-identified Republicans since June 8th was larger than among Democrats.”

Based in part on the expectation of major changes in policy likely to be implemented by the end of the summer, we expect GDP growth for 2017 to be 2.4% and 2.8% in 2018.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.We expect worker compensation to increase 4.0% in 2017 vs. 3.0% last year. The core inflation rate should climb modestly in 2017 from 2.2% in 2016 to 2.4% this year and 2.7% in 2018.  Such a scenario would keep the Fed on track for the very gradual increases in interest rates that it has noted previously.  Specifically, we expect the funds rate to be 1.25% by the end of 2017 and 2.0% by the end of 2018.

The high level of  confidence was evident in both the current conditions and expectations components.

Consumer expectations for six months from now climbed from 87.7 to 84.7.

Consumers’ assessment of current conditions declined  in May from 111.7 to 109.6.

Trends in the Conference Board measure of consumer confidence and the University of Michigan series on sentiment move in tandem, but there are often month-to-month fluctuations.  Both series remain at levels that are consistent with steady growth in consumer spending at a reasonable clip of  about 2.5% in the quarters ahead.

Stephen Slifer


Charleston, SC

Consumer Net Worth

June 8, 2017

Consumer net worth rose $2.4 trillion in the fourth quarter.  That works out to an annualized rate of increase of 10.1%.  Over the past year consumer net worth has increased 8.3%.

Net worth declined sharply during the recession but has long since recovered all that was lost and is actually 40.0% higher than it was prior to the recession.  The rebound reflects, in part, the steady increase in stock prices during the course of the past 7 years and in home prices which have been climbing steadily.

This high and climbing level of  net worth should encourage consumers to spend at  roughly a 2.5% pace in the quarters ahead.

Stephen Slifer


Charleston, SC

Consumer Confidence

May 30, 2017

The Conference Board reported that consumer confidence fell 1.5 points in May to 117.9 after having fallen 4.6 points in April to 120.3 after having surged upwards by 9.8 points in March to 124.9.  The March level was a 17-year high (December 2000).

Lynn Franco, Director of Economic Indicators at the Conference Board said  “Consumers’ assessment of present-day conditions held steady, suggesting little change in overall economic conditions. Looking ahead, consumers were somewhat less upbeat than in April, but overall remain optimistic that the economy will continue expanding into the summer months.”

Confidence data reported by the Conference Board are roughly matched by the University of Michigan’s series on consumer sentiment.   As shown in the chart below, trends in the two series are identical but there can be month-to-month deviations.   Any way you slice it, confidence remains at levels not seen in more than a decade.

The consumer should continue to provide support for overall GDP growth in 2017.  The stock market is near a record high level.  Home prices continue to climb.  Consumer net worth is at a record high level and rising.  Jobs are rising by about 170 thousand per month.  The unemployment rate is falling slowly. The consumer has little debt.  Interest rates remain low.  In addition, consumers are likely to get a cut in income tax rates in 2017.  Clearly, the consumer’s optimism is valid..

We anticipate GDP growth of 2.4% in 2017 and 2.8% in 2018.

Stephen Slifer


Charleston, SC

Personal Consumption Expenditures — Monthly

May 30, 2017

Personal consumption expenditures rose 0.4% in April after having risen 0.3% in March.  What we are really interested in is consumption spending in real terms (i.e., after adjustment for inflation) because that is what goes into GDP.    On that basis consumption spending rose 0.2% in April after having risen 0.5% in March .  Real consumer spending has risen 2.6% in the past year.

Because consumer spending is so volatile on a month-to-month basis, we find it helpful to look at a 3-month moving average which is what is shown above (in blue).  That 3-month increase in real PCE is now 1.1% versus 2.6% in the  past year. That is on the soft side, but the dropoff is expected to be temporary because consumer income is holding up nicely (see below).

Consumers feel great and confidence has increased in the post-election period.  And why not? The stock market is at a record  high level.  Jobs creation is robust which is bolstering income, gasoline prices remain low, consumers have little debt, and rates will stay low for some time to come even if the Fed very gradually raises short-term interest rates, and now they will presumably benefit from a cut in the individual tax rate.

Personal income rose 0.4% in April after having risen 0.2% in March , 0.5% in February and 0.6% in January.  During the past year personal income has risen 3.6%. Real disposable income which is what is left after inflation and taxes has risen 1.9% in the past year.

Real disposable income per capita is generally regarded as the best measure of our standard of living.  It is currently rising at a 1.2% pace which is  slightly below its 1.6% average increase in the past 25 years.  Somehow people seem to believe that because average hourly earnings has been growing slowly that our standard of living is growing much more slowly than it has in the past.  That is not really the case.

People seem to have an impression that hourly wages are stagnant.  That is inaccurate.  They grew fairly slowly at about a 2.0% pace for a while, but hourly earnings have been steadily accelerating and are currently rising at a 2.6% pace.  In addition, firms are paying workers in the form of incentive pay like bonuses and working them longer hours.  Thus, income is growing at a respectable pace.

With  personal income rising 0.4% in April and  consumption spending  also rising 0.4%, the savings rate was unchanged in April at 5.3% which is close to its long-term average of 5.5%.  The consumer has the ability to pick up his pace of spending in the months ahead.

Stephen Slifer


Charleston, SC

Consumer Loans

May 24, 2017

Consumer loans rose 1.5% in April after having risen 0.1% in March (the purple bars).  Over the course of the past year consumer loans have climbed by 5.8%% (in red).

Indeed, since the election bank lending of all types — business loans, mortgage loans, and consumer loans have all slowed dramatically.  During the past year such loans have climbed 4.1%. Given that the recent slowdown began right after the election it may have something to do with the fate of Dodd-Frank legislation under the Trump Administration.  We do not expect this slowdown to particularly long lasting, but it needs to be watched.  With 4.1% growth during the past year it is identical to growth in nominal GDP so it is not yet slowing the rate of growth in the economy, but if the extreme slowdown in recent months should continue that could present a problem.

Stephen Slifer


Charleston, SC late

Consumer Debt Service Ratio

March 24, 2017

Consumers debt service payments relative to their income were essentially unchanged in the third quarter at 10.0%.  This debt service ratio peaked at 13.2% of income in the fourth quarter of 2007, and it has fallen rapidly ever since then.  The current level of the debt service ratio is essentially the lowest on record for a series that stretches back to 1980 — 36 years ago!

The household debt service ratio is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio is a somewhat broader concept and adds automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments to the debt service ratio.  The picture looks much the same.

This series has averaged 16.6% over the past 30 years.  At 15.4% currently it is close to its record low level of 14.9% set in the fourth quarter of 2012.

Any way one slices it consumer debt is  at a very comfortable level and there is plenty of room for consumers to take on additional debt if they so choose.

Stephen Slifer


Charleston, SC