For U.S. consumers, everything is coming up roses. You wouldn't know it from this week's retail sales numbers but a number of indicators suggest U.S. consumers are primed to give the economy a major boost, should they choose to go on a spending spree.
U.S. consumers have "completely recovered from the financial crisis [and] recession," says David Blitzer, managing director and chairman of Standard and Poor's Index committee. "The consumer, financially, is in pretty good shape."
Some data points supporting that view:
- The S&P/Experian Consumer Credit Default Indices on defaults on both first mortgages and auto loans are below the lows of the prior cycle peak in 2004-05, with less than 1% of outstanding car-loan balances going into default in May.
- U.S. foreclosure activity hit a 10-year low in the first half of 2015 and is down 13% from the second half of 2014, according to data released Thursday by RealtyTrac.
- Bank credit card charge-offs have fallen to just over 4% of balances in the second quarter vs. nearly 9% five years ago, according to Experian. J.P. Morgan and Wells Fargo both said the percentage of loans they couldn’t collect was close to zero in the second quarter, The WSJ reports; J.P. Morgan CEO James Dimon described the credit quality of his bank's customers as “pristine.” Meanwhile, Bank of America reported loans delinquent by 60 days or more fell 14% from the first quarter and almost 50% from a year ago.
- Savings as a percent of disposable personal income is 5.1%, up from the 2% range during the Great Depression and a low of 1.9% in July 2005.
- Household debt as a precent of disposable income has fallen below 10% for the first time since at least 1980, according to the St. Louis Fed.
"Consumer spending has picked up... many households have both the wherewithal and the confidence to purchase big-ticket items," Fed Chair Janet Yellen said during her Congressional testimony this week, during which she cited the overall benefit of falling energy prices and gave a largely upbeat outlook. "Prospects are favorable for further improvement in the U.S. labor market and the economy more broadly," she said.
And while Yellen notes wage growth "continues to be relatively subdued," the Fed's preferred measure -- the Employment Cost Index -- was up 2.8% at the end of the first quarter on an annualized basis vs. an average of 1.7% during the current expansion.
"I think everyone is in a pretty good mood right now... people are spending," says Steve DiFillippo, the founder of Davio's Northern Italian Steakhouse and Yankee Trader Seafood, which has over 900 employees and combined revenue of $75 million. "People are doing well, at least our guests are... they seem to be happy and doing well."
One measure of consumers' potential spending power: only 20% of the roughly $3.1 trillion in available credit card limits were being used in the second quarter vs. 23% five years ago, according to Experian Intelliview data. Of course, it wouldn't be a good thing if everyone maxed out their credit cards but there's roughly $2.5 trillion of (theoretical) spending to give U.S. GDP a major boost.
'Very Challenged' and 'Behind the Curve'
"Conditions are right for an acceleration in household consumption," says Joe Brusuelas, chief economist at McGladrey.
So why are retail sales so punk? Retail sales fell 0.3% in June and May's gain was revised down to just 1%.
The problem is the retail sales report is "very challenged" and "behind the curve," according to Brusuelas. "We economists place way too much emphasis on this one report, which is entirely too dependent on an outmoded bricks and mortar economy."
The government's retail sales report misses huge parts of the consumer economy, such as auto leases, salons, air travel, healthcare spending and "the sharing economy is completely missing," Brusuelas says.
To this latter point, the economist says the retail sales report is totally missing the "profound structural and demographic shift in the spending environment" driven by Millennials who are "much more into experiential and services spending" vs. traditional retail purchases.
Furthermore, the three-month average gain for retail sales, excluding gasoline, is 5.3% which is "very robust," he says. "We actually had a pretty big pickup in spending that started in March, accelerated through the second quarter and I expect to spill over into the current quarter."
Indeed, Brusuelas expects first-quarter GDP to be revised to a gain of 1.5% vs. a drop of 0.7% when the Bureau of Economic Analysis announces advanced second-quarter GDP data and historic revisions to the prior year on July 30. He is also convinced the June drop in retail sales will be revised higher, based on Friday's robust housing starts data, which showed construction at the highest levels since 2007 and permits at heights not seen since 1990.
"In order to build things you have to buy materials," he quips. "You're going to see significant upward revision in building materials [in the retail sales data] over the next three-to-four months."
A 'Fragile' Boom
A few caveats to the bullish case on consumers: There are still millions of Americans without jobs and without access to credit. The big banks are using much stricter criteria these days, forcing many subprime borrowers into the so-called Shadow Banking system of payday lenders and online lenders such as PeachTree.
"American [consumers] are by and large optimistic and holding their own, but still fragile," says Gerri Detweiler, director of consumer education at Credit.com.
Conceding she mostly deals with consumers who are struggling, Detweiler lists a number of issues to inject a note of caution amid this otherwise upbeat analysis, most notably student loans and a coming wave of resets on HELOC and HAMP loans.
"Are we headed for a full blown crisis? Not likely since lenders have been much more conservative over the past seven or eight years," Detweiler says. "But a second downturn in the housing market, even one on a much smaller basis, could spell trouble for many."
There's also the issue of whether U.S. consumers are willing to spend again after having just gone through the worst downturn since the Great Depression. The U.S. may be suffering from what John Maynard Keynes called "the paradox of thrift," where what's good for individuals (i.e. saving) isn't necessarily good for the overall economy.
Any number of issues may prevent it -- from geopolitics to a sudden reversal in the stock market -- but the macro data suggest U.S. consumers are poised for liftoff.