RECESSION WATCH
Recent data on the U.S. consumers are worrisome:
- Since March 2016, real expenditures have increased 3.5%.
- While real disposable income rose only 1.7%, half the spending pace!
- Total consumer credit rose 7.3% during the same period, twice the spending growth and more than 4 times the income growth.
- Real income growth has slowed to a crawl since peaking at +5.3% YoY in January 2015. Real income growth slipped all the way down to zero in December 2016 and was only +1.2% last June. The recent uptick was greatly helped by the 0.7% decline in the YoY change in the PCE deflator from February to May, a decline which the Fed qualifies as transitory.
- The income slowdown is principally the result of slower employment growth from +2.3% YoY in February 2015 to +1.9% in January 2016, +1.5% in July 2017. Since wage growth has remained stuck around 2.5%, there has been no offset on total aggregate payrolls (a proxy for labor income) …
…which, in real terms, have slowed from +5.1% in Q1’15 to +3.4% in Q1’16 to +2.5% in Q2’17, lately helped in large part by the “transitory” decline in inflation.
- Like they often do when income growth slows down, Americans have dipped into their savings (either by dissaving or by borrowing more) throughout 2016 but borrowings have slowed measurably in 2017, either because consumers are feeling the squeeze and/or because lenders, experiencing rising delinquencies and loan losses, are tightening lending standards.
Unless employment and/or real wages accelerate meaningfully, American consumers could tighten up even more given their current very low savings. Were this to happen during the important second half of the year (back-to-school, Thanksgiving, Christmas), it could drag the U.S. economy into a recession, right when central banks are out of ammo and Washington is in disarray.
