Monday, 16 of July of 2018

Economics. Explained.  

Category » Consumer

Consumer Sentiment

July 13, 2018

The preliminary reading for consumer sentiment for July fell 1.1 points to 97.1 after having risen 0.2 point in June.  March’s level of 101.4 was the highest level of sentiment since January 2004.  Thus, it remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, ” So far, the strength in jobs and incomes has overcome higher inflation and interest rates. The darkening cloud on the horizon, however, is due to rising concerns about the potential negative impact of tariffs on the domestic economy.”

Given the tax cuts we expect GDP growth to climb from 2.6% in 2017 to 3.0% 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 3.5% in 2018 vs. 1.8% last year. The core inflation rate (excluding the volatile food and energy components) rose 1.8% in 2017 but should climb by 2.2% 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 2.2% by the end of 2018.

The June changes in both the current conditions and expectations components were statistically insignificant.

Consumer expectations for six months was essentially unchanged at 86.4.

Consumers’ assessment of current conditions fell 2.6 points from 116.5 to 113.9.

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 2018.

Stephen Slifer


Charleston, SC

Personal Income and Consumption Expenditures — Monthly

June 29, 2018

Personal consumption expenditures rose 0.2% in May after having jumped 0.6% in March and 0.5% in April. Over the past year they have risen a solid 4.6%.    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 was unchanged in May after having risen 0.3% in April and 0.6% in March.  Real consumer spending has risen 2.3% 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 2.2% versus 2.3% in the  past year.  Thus, it seems pretty steady.

Consumers feel great.  And why not? The stock market is doing well despite the trade fears and has re-gained much of what was lost during the correction.  It should continue to trend upwards as the year progresses and hit yet another record high level.  Jobs creation is robust which is bolstering income, gasoline prices remain relatively low, consumers have little debt, rates will stay low for some time to come even if the Fed very gradually raises short-term interest rates, and consumers are benefiting from the cut in individual tax rates.

Personal income rose 0.4% in May after having climbed 0.3% in March and 0.2% in April.  During the past year personal income has risen 4.0%.

Real disposable income rose 0.2% in May after having risen 0.1% in April and 0.3% in March.  As a result real disposable income, which is what is left after inflation and taxes, has risen 1.7% 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 1.0% pace which is  below its 1.6% average increase in the past 25 years.  However, it should reach a 2.0% year-over-year increase by late summer.

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 about a 2.7% pace but it bounces around from month to month.  Furthermore, as workers retire a very high wage-earning worker is replaced by someone who earns considerably less, which biases average  hourly earnings downward.  The Atlanta Fed has a series which presumably eliminates this downward bias.  It is rising at a solid 3.2% pace.  The bottom line is that, income is growing at a respectable pace.  If hourly earnings continue to climb, personal income will grow faster as well.

The savings rate rose 0.2% in May to 3.0%.  It 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.  Also, keep in mind that the impressive increase in the stock market and rising home prices have boosted assets, and the ratio of consumer assets in relation to debt is the lowest since the early 2000’s.  Thus, the consumer is willing to save a bit less than in the past.

Stephen Slifer


Charleston, SC

Consumer Confidence

June 26, 2018

The Conference Board reported that consumer confidence fell 2.4 points in June to 126.4 after having risen 3.2 points in May.   The February level of 130.0 was an 18-year high (highest since November 2000 — 132.6).

Lynn Franco, Director of Economic Indicators at the Conference Board said,  “Consumers’ assessment of present-day conditions was relatively unchanged, suggesting that the level of economic growth remains strong. While expectations remain high by historical standards, the modest curtailment in optimism suggests that consumers do not foresee the economy gaining much momentum in the months ahead.”

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 since the early 2000’s.

The consumer should continue to provide support for overall GDP growth in 2018.  The S&P 500 stock market index is struggling with tariff issues, but the Russell 2000 and the NASDAQ Composite are at record high levels.  Home prices continue to climb.  Consumer net worth is at a record high level and rising.  Jobs are rising by about 190 thousand per month.  The unemployment rate is falling slowly. The consumer has little debt.  Interest rates remain low.  In addition, consumers will get a cut in income tax rates in 2018.  Clearly, the consumer’s optimism is valid.

We anticipate GDP growth of 3.0% in 2018.

Stephen Slifer


Charleston, SC

Consumer Loans

April 27, 2018

Consumer loans rose 3.9% in March after having risen 4.6% in February (the purple bars).  Over the course of the past year consumer loans have climbed by 5.4% (in red).

Indeed, since the election bank in November of last year 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 uncertainty regarding the fate of Dodd-Frank legislation under the Trump Administration.

Stephen Slifer


Charleston, SC

Consumer Net Worth

April 27, 2017

Consumer net worth rose $2.0 trillion in the fourth quarter.  That works out to an annualized rate of increase of 8.6%.  Over the past year consumer net worth has increased 7.8%.

The growth in net worth reflects both the steady increase in stock prices during the course of the past several years, and the growth in home prices.

This high and climbing level of  net worth should encourage consumers to spend at  roughly a 2.5% pace in 2018.

Stephen Slifer


Charleston, SC

Consumer Debt Service Ratio

April 3, 2018

Consumers debt service payments relative to their income were essentially unchanged in the third quarter at 10.3%.  This debt service ratio peaked at 13.2% of income in the fourth quarter of 2007, and it fell rapidly for the next give years and eventually dipped to the 10.0% mark which is the lowest on record for a series that stretches back to 1980 — 38 years ago!  It has just begun to inch its way upwards again in the past couple of quarter but, still, a 10.3% ratio is very low by any historical standard.

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 although the recent upturn is somewhat more pronounced.  It briefly fell to  15.0% in Q4 2012  and is now at 15.9% which is still well below its historical average of 16.6%.

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