Trillion Dollar Hit
04/15/10
Consumer credit decreased at an annual rate of 5.5 % in February 2010 and by 4,5% versus February 2009. Revolving credit decreased at an annual rate of 13%, and non-revolving credit decreased at an annual rate of 1.5%. The consumer is still deleveraging. Good! Retail sales jumped 1.6% in March, which came on top of upward revisions to the growth of sales in February. The consumer is spending more than before. Good!
Wait a minute - how can both be true? We talked about it in our March newsletter, but it still is kind of a puzzle. How can consumers spend more and pay off more debt at the same time?
The Great Recession of 2008 hurt overleveraged households and lead to a dramatic decline in consumer spending. In the second half of 2008, consumer spending was declining at an annualized rate of more than 3% and the overall contraction in spending was the most severe since the 1930s. However, a strange thing began to happen during the second half of last year. Since the summer, consumer spending has been growing 3% in real dollar terms. Holiday sales were up modestly. February retail sales were surprisingly strong, with non-auto spending up a brisk 0.8%. Most of those results exceeded expectations, despite weak employment and income growth. The Census Bureau reported Wednesday that retail sales jumped 1.6% in March, which came on top of upward revisions to the growth of sales in February. The standout in March was a 6.7% surge in the sale of cars -- new and used -- and auto parts. But even excluding this huge category, March sales were up a solid 0.6%.
Let us look at this subject one more time. The first chart above shows Total Consumer Credit Outstanding. The raw number peaked in September 2008 at $2,578.9 Billion and fell since then to $2,447.9 Billion. The reduction over that 18 months period amounts to exactly $131 Billion or an average of $7.28 billion per month. The second chart shows Retail Sales. The peak was reached in November 2007 at a transaction volume for that month in the amount of $342.8 billion. The low was reached in December 2008 with a transaction volume for the month of $ 297,6 Billion. After years of almost uninterrupted growth in retail sales, the nation's merchants lost in that thirteen month period $65 Billion or some $5 Billion in sales per month. Since then retail sales have completely equalized that loss. This quick calculation compares the stock of Consumer Credit Outstanding with the flow of monthly retail sales. Both items relate to the expense side of the household ledger. Let's see what the income side looks like. We start by looking at the nation's disposable personal income. This is defined as the sum of wage and salary disbursements, other labor income, proprietor's income (rental income), dividend and interest income, and transfer payments to individuals (welfare, unemployment insurance, etc). Disposable personal income is the portion of personal income that is left after personal taxes are subtracted, and thus is the amount of personal income available to people for consumption spending and saving. Disposable personal income is one of the many key economic indicators used to gauge the overall state of the economy. Changes in disposable personal income over time indicate trends in a country's material standard of living. Countries with rapid population growth rates must have an even more rapid rate of growth in personal income in order to maintain material living standards. You can see below that disposable personal income in this country has almost continually risen, as indicated by the blue line. The steady increase was the result of an expanding labor force and rising nominal wages and other related income. The red line compares each current monthly number with the number for the same month one year ago. This number can be thought of as the growth rate of disposable income, which grew over the years at a minimum of $200 Billion per year. You can see that the spike up peaked in May 2008 at over plus $895 billion quickly followed by the spike down in May 2009 at a negative $178 Billion. This amounts to a trillion dollar hit that the economy suffered in a 12 months period. Since that spike down in May 2009 we have recovered by $450 Billion in 9 months or increased disposable personal income by about $50 Billion per month. No wonder that retail sales increase and that consumers still have enough left to reduce the mountain of debt they are carrying. Let's not forget that the debt burden has become considerably cheaper over the past two years since interest rates have fallen across all maturities and across all loan categories. A $ 2.5 trillion debt burden that garnishes 2% less in interest payments (from mortgages to credit cards) amounts to a relief of $ 50 billion per year or $4.2 billion per month. It all adds up and I am sure you can see by now how consumers can indeed pay down debt and also increase spending.
The last chart above shows the overall Financial Obligations Ratio of consumers in the US. You can see that deleveraging is taking place fast and furiously. Lower interest rates are having their intended effects while consumers have learned their lessons just like corporations have learned their lessons after the tech bubble burst in 2000. Our $15 trillion economy has overcome a $1trillion hit and now the rebuilding of household balance sheets is progressing apace. The apparent dichotomy between deleveraging consumers and rising retail sales does not constitute a contradiction. The flow of income has been enough thus far to pay down debt and increase spending. Here too, the permanent gnashing and grinding of the teeth is not necessary. Retail stocks have been the hottest sector of the first quarter and this earnings season should generally produce the justified earnings increases to keep the sector going. There are many more arguments but for now I continue to be optimistic about the stock market. This coming week should give us some weakness based on the SEC fraud charges against Goldman Sachs. I read the complaint (“civil” not “criminal”) and I must say that if this is the best case that the SEC has then they are in trouble. Use this weakness to buy in the coming weeks.
Hermann Vohs
"If you think nobody cares if you're alive, try missing a couple of car payments."
Earl Wilson
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
