Why Aren't Consumers Spending?

One would think given low unemployment, rising wages, still low interest rates, high confidence and a rising wealth effect (thanks to a stock market at record highs and rising home prices) the consumer should be in the sweet spot in terms of spending. Yet we are pestered with such news as Sears declaring bankruptcy and many retailers falling on hard times.

Consumers Spending Less

Weakness can also be seen in the aggregate data, including the recent miss in U.S. retail sales, the fourth consecutive miss relative to tempered consensus expectations. It’s hard not to be a little concerned about the health of the consumer. We see less spending in restaurants, department stores, and gasoline stations.

Big ticket items, namely motor vehicle sales, fell another 3 percent in June, with the seasonally adjusted annual pace now at just 16.41 million. This compares to a cycle high of 18.3 million in June of 2016. Sales are now negative on a year-over-year basis.

Examining the factors that affect consumer spending (table), the consumer should be given an A+. Unemployment is low, wages are growing, inflation remains in check, interest rates are low and confidence is high. The wealth effect should be in high gear. Consumers should be willing to spend more when stocks are making all-time highs and widely held assets such as housing are rising.

With this A+ report card, why is this not transferring into a boon for all retail and consumer stocks? In this first instalment of a two-part Market Ethos series, we will dig into this disconnect. Initially from a macro perspective, and next week discussing changing behavior with portfolio management implications.


Credit is Growing, but There Are Cracks

Credit expansion is moving in the right direction: higher. Unfortunately most of it is being driven by auto and student loans. During the past year, consumer credit expanded by $218 billion, yet 68% of this ($149 billion) was from expansion in auto and student loans. Rising auto credit certainly helps the auto industry, but not much beyond this sub-industry. And student credit expansion, well, that won’t help Sears. We’re certainly not seeing the type of pre-crisis behaviour where consumers borrowed heavily to finance their healthy appetite of regular consumption.

Not surprisingly, it’s where we see decent growth that delinquencies remain high. Student-loan delinquencies remain at a high level, though that has flat-lined over the past few years. Auto loan delinquencies are moving higher, as well as a small increase among credit cards. With rates as low as they are, the absolute level is still quite a bit lower versus pre-financial crisis levels. We’re not too concerned with these levels, but a meaningful acceleration would be cause for worry.


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