Saturday, 21 of October of 2017

Economics. Explained.  

Category » Consumer

Consumer Sentiment

October 13, 2017

Consumer sentiment for October surged 6.0 points in October after having declined 1.7 points in September.  The September drop clearly reflects a drop-off in consumer expectations following the combination of Hurricanes Harvey and Irma, but sentiment came roaring back in October to the highest level since the start of 2004!

Richard Curtin, the chief economist for the Surveys of Consumers, said “This “as good as it gets” outlook is supported by a moderation in the expected pace of growth in both personal finances and the overall economy, accompanied by a growing sense that, even with this moderation, it would still mean the continuation of good economic times.”  He added that “The data indicate a robust outlook for consumer spending that extends the current expansion to at least mid 2018, which would mark the 2nd longest expansion since the mid 1800’s.”

Given that rebuilding effort combined with an expectation of major changes in policy likely to be implemented between now and yearend, we expect GDP growth for 2017 to be 2.3% 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 be reasonably steady this year at 1.8% thanks to a price war in the cell phone industry and falling prescription good prices caused by intimidation from President Trump.   However prices should rise by 2.3% 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 jump in sentiment was in both the current conditions and expectations components.

Consumer expectations for six months from now rose from 84.4 to 91.3.

Consumers’ assessment of current conditions rose in October from 111.7 to 116.4.

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

Personal Consumption Expenditures — Monthly

September 29, 2017

Personal consumption expenditures rose 0.1% in August after having risen 0.3% in July.  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 declined 0.1% in August after having risen 0.2% in July.  Real consumer spending has risen 2.5% 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 1.8% versus 2.5% in the  past year.  Thus, it appears that recent data are pointing to some slowdown in the pace of consumer spending, but just remember that Hurricane Harvey clearly biased downwards real consumer spending in August (-0.1%).

Despite the drop in real spending consumers feel great.  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 they will benefit from a cut in the individual tax rate.

Personal income rose 0.2% in August after having risen 0.3% in July.  During the past year personal income has risen 2.8%. Real disposable income which is what is left after inflation and taxes has risen 1.2% 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 0.5% pace which is  well below its 1.6% average increase in the past 25 years.

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 2.5% 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.

The savings rate was unchanged in August at 3.6%which is significantly below its long-term average of 5.5%.  The consumer is feeling good and is willing to save less than he or she has thus far in this business cycle.  It is important to note that consumers are not dis-saving or outspending their income.  The drop in the savings rate does not necessarily mean that consumers now need to slow their pace of spending.  Note how the savings rate fell sharply below its long-term average of 5.5% back in 2005.  It stayed low for another three years until the recession began in December 2007.

Stephen Slifer


Charleston, SC

Consumer Confidence

September 26, 2017

The Conference Board reported that consumer confidence fell 0.6 point in September after having risen 0.4 point in August.  The March level of 124.9 was a 17-year high (December 2000).

Lynn Franco, Director of Economic Indicators at the Conference Board said “Consumer confidence decreased slightly in September after a marginal improvement in August.  Confidence in Texas and Florida, however, decreased considerably, as these two states were the most severely impacted by Hurricanes Harvey and Irma. Despite the slight downtick in confidence, consumers’ assessment of current conditions remains quite favorable and their expectations for the short-term suggest the economy will continue expanding at its current pace.

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 2018.  Clearly, the consumer’s optimism is valid.

We anticipate GDP growth of 2.3% in 2017 and 2.8% in 2018.

Stephen Slifer


Charleston, SC

Consumer Loans

July 25, 2017

Consumer loans rose 1.4% in June after having risen 1.5% in May (the purple bars).  Over the course of the past year consumer loans have climbed by 4.5% (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 3.6%. 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 be particularly long lasting, but it needs to be watched.  With 3.6% growth during the past year it is a shade less than growth in nominal GDP (4.1%) 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

Consumer Debt Service Ratio

June 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 — 37 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

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