1.3 trillion reasons to spend
The consumer has a lot more firepower than many appreciate.
[My writer and I didn’t do a good job of coordinating vacations. So, in place of my normal weekly, I’m offering this special on the amazing consumer. My regular column returns a week from Friday.]
Plenty to keep consumers going strong. They’ve been one of two big surprises of this cycle (the other: remarkable job growth). Annualized consumer spending shot up 3.8% in Q1, the fastest pace in two years and almost triple Q4 ’22’s increase. April spending was even stronger. It helps that anyone who wants a job can find one, often at higher pay than before Covid. But arguably the bigger driver behind King Consumer is $9+ trillion of fiscal and monetary largesse during the pandemic. BCA Research strategists estimate there’s still $1.3 trillion of excess household savings floating around, enough to satisfy pent-up demand through year-end. Indeed, with consumer spending accounting for 70% of GDP, it’s hard to see the recession consensus expects until 2024 at the earliest.
It's not just that consumers can tap their Covid piggy banks. Combined with the lowest interest rates in generations, a pandemic bull market and the strongest job market in half a century, the flood of Covid funds helped households of all incomes shore up balance sheets. They locked in low mortgage rates, the biggest household expense, and paid down debt. While borrowing for autos, credit cards and other non-mortgage categories has since risen, along with delinquencies, it’s still low on an historical basis, with the share of disposable income going to debt service lower than it had ever been before Covid. At 9.7%, the household debt service ratio remains near a 40-year low, making consumer rate sensitivity an echo of what it was in past cycles.
To be sure, consumer headwinds are picking up. At 20.1%, the average credit card APR is at a record high, and student loan payments that were frozen during Covid are scheduled to restart in August if not sooner. Strategas Research estimates those repayments could suck $5 billion out of aggregate monthly income, creating a GDP drag of two-tenths of a point over 12 months. The Biden administration reportedly is weighing ways to ease the sting, possibly with a new income-driven repayment program that would cap payments to a percentage of a borrower’s income. Whatever happens, the bulk of the impact will hit the 25- to 34-year-old cohort that holds a disproportionate amount of student loan balances (and also represents where auto and credit card debt relative to income has risen the most).
There are other budding signs of weakness. Initial jobless claims have inched up, and the level of job openings has slipped, albeit from such extreme highs that they are still very elevated relative to the size of the labor force. The softening generally is occurring in high-paying industries such as tech and finance, where wage growth went from +9% last spring to around +3.7% lately. Not great, but not so bad, either. Especially for workers whose skills are in demand across a range of industries if they’re willing to leave their fields. At 4% of workers, the tech and finance industries aren’t large enough, in the words of Empirical Research, “to crash the bus” as they struggle with the post-Covid WFH realities.
On the plus side, the weaker inflation we’re seeing this summer is akin to a tax cut for households. It’s boosting real incomes. Price inflation in fact has been slowing more rapidly than wage inflation of late—and wages may well be accelerating. A potentially better read is provided by the Atlanta Fed Wage Growth Tracker, which compares wages by job and demographic characteristics. It estimated wage growth accelerated in May to 6.5% y/y from 5.1% in April. These sticky wages are symptomatic of a still very tight labor market, helping explain why consumers’ concerns about losing their jobs are at a 13-month low and why worker demands are being met. FedEx pilots are in line for a 30% raise, Delta pilots are getting a 34% boost and United pilots expect even more—the company’s latest offer would boost its costs more than $8 billion, making the pact the richest deal ever from a mainline carrier.
It is true that excess savings keep declining and may already have run out among some in the lowest cohorts. This, along with the lagged effects of a higher-for-longer Fed and fallout over the recent banking stress, is why many on Wall Street see a recession coming. Just don’t count out the consumer. Beyond still robust job and income growth, Yardeni Group notes that baby boomers, who are retiring in increasing numbers, are sitting on $73 trillion in net worth that they are spending apace (and sharing with their progeny). That’s a lot! Along with rising wages, we are witnessing an unappreciated tailwind. Until further notice, the consumer reigns supreme!
Small talk for the upcoming July 4 weekend barbecue
Bank of America shares that:
- People in Japan who got used to face masks during Covid are now attending smiling lessons. (Smiling is almost as good for your mood as a pet.)
- Air pollution in New York got so bad from the Canadian fires that smoking 1/2 pack of cigarettes was healthier than breathing in the air. (We shouldn’t smoke cigarettes!)
- The carbon footprint of new clothes brought into the U.K. each month is greater than flying a plane around the world 900 times. (I wonder, what about new shoes?)
- Humans have made enough plastic since World War II to wrap the surface of Earth entirely in cling film. (I’m certainly not going to use this one at my barbecue!)
- Loneliness can be as detrimental as smoking 15 cigarettes a day. (Still, we shouldn’t smoke cigarettes!)
- Owning multiple pets emits more greenhouse gases per year than someone traveling in a private jet. (Pets are a great antidote for loneliness).