Time to worry about the American consumer?
The BEA has just published revisions to the National Accounts. The big surprise is that the so-called frugal consumer was actually not saving as much as thought. The savings rate for Q1’17 was revised from 5.1% to 3.9%, slipping to 3.8% in June. One way to look at that is to claim that the U.S. consumer has actually not really changed and is still willing to spend liberally. The other way is to understand that the savings rate is but the residual between income and spending and that the U.S. consumer has recently spent way more than it earned and will soon need to do something about it.
- Newly revised data from the Bureau of Economic Analysis show that American consumers now saves about 35 per cent less than in 2015.
- Americans have made up the difference between mediocre spending growth and abysmal income growth by sharply reducing how much they save. The current gap between growth in consumption and disposable income is among the widest since the data begin.
- Consumption would have slowed into recessionary territory if not for the collapse in the savings rate.
- Net worth relative to disposable income is currently at its all-time high because American household net worth has soared by about $7.2 trillion — a little more than 8 per cent — since the start of 2016. From a certain point of view, therefore, the decline in the savings rate isn’t worrisome but the logical outcome of asset price movements.
- The unanswered question is whether the drop in the aggregate savings rate is actually being driven by people who have gotten richer, or instead by those struggling to sustain their expenses in the face of stagnant real incomes. Most wealth is in the form of financial assets owned by a sliver of the population. Are they really the ones holding up the aggregate consumption data? If not, how much longer can America’s dis-savers sustain this expansion?
Since March 2016: real income +1.7%; real expenditures: +3.5%. Clearly unsustainable. Either real income accelerates markedly (higher wages and/or lower taxes) or real spending slows down dangerously. Or, of course, the savings rate goes even lower.
Hmmm…This needs a close watch. Next retail sales report is Aug. 15.
Maybe the bull market is being spent:
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Americans Keep Crushing It With Their 401(k)s The stock market is fueling all-time highs in retirement account balances, with the average IRA breaking into the six figures.
Meanwhile, far away from main street:
Rosengren: Tight Labor Markets Justify Fed Plans to Keep Raising Rates Boston Fed President Eric Rosengren said tight labor markets should keep the U.S. central bank on its path to gradually raise rates and start slowly shrinking its balance sheet, despite a surprising pause in inflation pressures this spring.
(…) While the Federal Reserve’s preferred inflation gauge has shown price pressures have eased in recent months, Mr. Rosengren said he was more focused on longer-run trends in labor markets, which argue for continued rate increases, than on month-to-month inflation figures. (…)
Several measures of wages and salaries show that over the last two years, “the trend is very clearly going up, which is an indication that we’re probably a little past full employment,” Mr. Rosengren said. “And to be honest, it’s a little early to be seeing that” because the unemployment rate only recently fell below the level officials believe will generate inflation. (…)
Employers can be reluctant to pay more “until it’s clear that you actually have to do it,” Mr. Rosengren said. “I think we’re getting to the point in many places…where they’re saying, ‘It’s going to cost me too much money not to hire the extra labor. It’s worth paying those higher wages.’” (…)
The Goldman Sachs wage tracker, which takes into account various earnings indicators, shows a meaningful slowdown as well. (The Daily Shot)
Source: Goldman Sachs, @joshdigga
- While younger workers saw their annual pay increases improve (on average), wages for those who are 55 and older are growing at the slowest pace in recent decades (light blue line).
Source: Morgan Stanley
“My suspicion is it’s the idiosyncratic factors, it’s transitory and that the factors pushing down inflation are going to dissipate over time,” Mester told reporters on Wednesday after delivering a speech to Ohio community bankers in Cincinnati. “I still have a forecast for a gradual increase in inflation back to 2 percent over time.”
Mester is echoing Yellen but this chart suggests there are quite a few idiosyncratic factors nowadays:
Source: Goldman Sachs, @joshdigga (via The Daily Shot)
Global Inflation Hits Lowest Level Since 2009
The Organization for Economic Cooperation and Development Thursday said consumer prices across the G-20 were 2% higher than a year earlier. The last time inflation was lower was in October 2009, when it stood at 1.7% as the global economy was starting to emerge from the sharp downturn that followed the global financial crisis. (…)
While global economic growth appears to be picking up this year after a disappointing 2016, one ingredient for a sustained pickup in inflation is still missing: an acceleration in wages.
Central bankers in developed economies are puzzled by the sluggish pace of pay rises given continuing declines in jobless rates. But they believe that economic growth will ultimately eliminate the gap between what their economies can produce and what they are now producing, pushing up wages and prices.
OPEC’s Existential Sucker Punch
EARNINGS WATCH
- 350 reports in, 72% beat rate, +5.8% surprise factor.
- Blended Q2 EPS growth: +11.4% on +4.9% revenue growth.
- Ex-Energy EPS are up 8.5% on 4.1% revenue growth.
- Margins are improving in all sectors except Cons. Discretionary, Materials, Utes and Reits.
- Big margins gains in Cyclicals, even Cyclicals ex-Energy, and in IT.
- 64 companies have pre-announced Q3’17: 30 positive (17 at same time last year, 28 at same time in Q2’17), 31 negative (33, 30).
- Q3E: +7.3%. Q4E: +12.4%.
- Trailing 12-m EPS: $125.58.
Trump Pushes Bill to Reduce Legal Immigration President Donald Trump announced a proposal to cut the number of green cards issued annually by half, embracing a Senate measure that advances his drive to reduce legal as well as illegal immigration into the U.S.
Simple math for the President: GDP growth = workforce growth X productivity growth. Now some charts on that:
From David Rosenberg last February:
Spectre of discord: the West and Russia
On Donald Trump’s election, many Europeans worried that America would pivot towards Russia without their say-so. Now they fear the opposite. Yesterday Mr Trump signed a bill—pushed through Congress last week—imposing new sanctions on Russia over its alleged interference in last year’s presidential election. Some European leaders fear these will hurt their country’s firms (for example, German companies working on joint Russian projects such as the proposed Nord Stream 2 pipeline through the Baltic sea). On Monday Germany’s economy minister called the sanctions illegal and urged the European Commission to prepare to retaliate. Jean-Claude Juncker, the commission’s president, has publicly contemplated “countermeasures” if Brussels does not receive reassurance from the White House. But the likes of Poland and Britain are less concerned. Despite their differences, America and Europe have so far sustained a united front on sanctions since their introduction three years ago. Is that fragile consensus starting to fracture? (The Economist)
, along with downward revisions to earlier periods. 
Sales fell 7% last month, compared with a year earlier, according to Autodata Corp. Research firm J.D. Power said manufacturers typically pull back on sales incentives after the July Fourth holiday, “but this year elevated inventory levels coupled with the sales slowdown, have compelled them to maintain aggressive discounts throughout July.†(…)
