Often of late I’ve heard CNBC talking heads, when asked about the stock market, acknowledge that it faces many challenges, but that the U.S. consumer is “healthy.” Therefore “the bull market is still intact,” or some similar feel good message.
The talking heads are right to focus on consumers because their spending represents 72% of U.S. GDP, up from 65% in 1960. [Sidebar. If consumer spending grew share, what spending shrank? Ready? Defense spending. It was 11% of GDP in 1960 and 4% today. Maybe assault rifle sales just moved from the military to civilians.]
But I, like Ronald Reagan, need to “trust but verify.” So let’s look under the hood of the American Consumer. I put out several posts on Seeking Alpha recently suggesting that the stock market was peaking. After looking under the U.S. consumer’s hood, I am more confident in my bearish market call. As usual, I learn by making pictures.
Consumer spending has started to sputter.
This chart shows a history of U.S. consumer spending, displayed as a 5-year rolling average to discern trends, and adding the current year-over-year (YoY) reading:
You can see the long-term downtrend in consumer spending growth. The highs keep getting lower, and spending growth at present is below even the recent trend. Part of the reason is steadily slowing population growth, as the chart shows. But consumer spending growth used to be 4-5 percentage points faster than population growth; today it is only about 2 percentage points higher. Hmm.
Wage growth has also steadily slowed.
Here’s the history and the present:
This slowing growth trend obviously explains most of the slowing consumer spending. There continues to be hope for stronger wage growth because of the steadily declining unemployment rate. But there is a worrying sign, however. The number of unfilled jobs in our fair land seems to have topped out:
The consumer savings rate, while historically low, has been rising. That’s bad for GDP.
Economists are always moralizing that people should save more. But they don’t mean it. Every dollar saved is one less dollar of GDP.
The consumer savings rate reported by the BEA is messy (just trust me on this). I therefore adjust it to estimate the amount that consumers contribute to their investment portfolios, as a percent of their income:
Two trends are evident from the chart. One is that the savings rate declined over time; slowing wage growth led many to save less in order to keep spending growing. The other trend is that financial savings recovered sharply over the past decade. The more saved, the less spent.
[Another sidebar. The Federal Reserve estimates that holding gains on household assets were a dazzling $37 trillion over the past decade, and $14 trillion over the past three years alone. Why save more when the markets are substantially increasing your wealth anyway? A probable reason is growing income inequality. People are likely going to save a much higher proportion of their second million of annual earnings than the first.]
Consumers are borrowing a lot less. That’s also bad.
This chart measures the past year’s consumer borrowing (mortgage, credit card, auto, student, etc.), as a percent of household income:
This chart can best be understood by dividing it into four eras:
- 1960-2000. “Normal.” Consumer borrowing added on average about 6% to consumers’ spending power.
- 2001-2007. The bubble. Consumer borrowing surged to an 11% annual boost to spending power. Whee!
- 2008-2103. The bust. Sadly, inevitable after a bubble. The unusual decline in consumer debt caused a nasty recession and weak recovery.
- 2014 to today. The hangover. New consumer debt has been adding only 2% to consumers’ spending power, and only 2.6% at its last reading. Since the bubble, lenders have been quite cautious.
Cautious lending is great for the health of the financial system, but it sucks for consumer spending and GDP.
To the rescue – Uncle Sam!
So consumer spending has been restrained because of disappointing wage growth, higher savings rates and weak debt growth. Call in the Feds! But not the Fed you’re thinking of. After all, the shockingly low interest rates of the past decade haven’t gotten consumer borrowing going. No, these are the Feds that dole out benefits and collect taxes. These Feds have become critically important to consumer spending.
I measure the impact of the government on consumer spending by calculating “net government transfer payments”. [Yet another sidebar. The creation of this measure should have won me a Nobel Prize, but apparently my good looks created some jealousy in Norway.] This number adds the benefits that households receive from the government – Social Security, Medicare/Medicaid, unemployment benefits, etc. – and subtracts the income and payroll taxes that households pay. The resulting net government transfer payments, as a percent of GDP have tracked historically as follows:
For the four decades from 1960-2000, this ratio averaged (7%). (It was negative because households must pay for other services like the military and the National Weather Service.) Today the ratio is only (2½%). That 4½%-of-GDP swing in net government transfer payments as a percent of GDP currently adds nearly $1 trillion a year to consumer spending power! Thanks Uncle Sam! Or more accurately, thanks to government bond investors that finance the transfer payment gap.
One final picture. Where is the shift in net government transfer payments coming from? The recent lower tax rates are a small part of the answer. The major drivers are shown in this chart:
Income supports, like Medicaid and Food Stamps, clearly have risen. And retiree benefits – Social Security and Medicare – are a runaway train. Together they were 7% of household income in 1960, rose to 13% by 1980, crept up to 14% by 2000 and then took another leap to 19% today.
The “healthy” U.S. consumer that the talking heads keep referring to is maintaining her rosy cheeks with a heavy dose of drugs provided by the federal government, and in turn the debt markets. That unwholesome source of health creates more risk to GDP, and in turn to the stock market. This fact is clearly not priced into stock values. But maybe it should be by you.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.