Written by Steven Hansen
It could be that the consumer end of the economy has reached the point it cannot add any more debt. Unlike the federal government which has sovereign dollars to print, the consumer has a fixed amount they can spend including paying back any loans.
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For those who are not paying attention to the Federal Reserve’s consumer credit data released this past week, consumer credit growth has been slowing for the last 6 months. The reason is that revolving credit (such as credit cards) growth has significantly slowed.
There is a general correlation that shows consumer credit growth and consumer spending move in the same direction. Since mid-2019, both consumer credit and consumer spending growth have moderated.
Looking at the ratio between consumer credit and consumer spending – this ratio has little changed over the last 4 years even with the extremely low-interest rates which allow consumers to pay back loans with little charged interest.
In fact, the consumer debt repayments (as a percent of income) remain at very low levels.
On a related note, former Fed Chair Ben Bernanke this past week expressed concern about the low inflation rate.
Low inflation can become a self-perpetuating trap. The costs associated with a very low neutral rate, measured in terms of deeper and longer recessions and inflation persistently below target, underscore the importance for central banks of keeping inflation and inflation expectations close to target.
Inflation and interest rate trends have correlated historically in trend – with inflation approximately 2% lower than interest rates (used 10-year bonds as a proxy) UNTIL the Great Recession. Since the Great Recession, interest rates and inflation have been nearly equal. Under these conditions, there is no incentive for the private sector to buy bonds in any form.
The Fed’s extraordinary monetary policy which included suppressing interest rates through the federal funds rate is backfiring and will cause the Fed to make significantly more purchases in the municipal, corporate and treasury bond markets.
Simply put, bonds must provide positive returns after adjusting for inflation to attract private savings dollars.
Economic Forecast
The Econintersect Economic Index (January 2020) forecast fell again this month and continues to show the lowest level of growth since the economic slowdown in 2016. The current reading is now marginally below the 2016 minimum. The ongoing weakness of manufacturing, transport, and imports continues to weigh on our economic forecast. It is interesting that other economic forecasts are all over the map in the direction of the economy.
Although our index is now in negative territory similar to 2016, this penetration into negative territory is not yet severe or persistent – and our opinion is that our index is not suggesting an economic contraction at this point. But another month of decline might be enough to suggest a possible recession is coming.
Our employment forecast is forecasting POOR employment growth.
Economic Releases This Past Week
The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.
Overall this week:
trade data may be at the bottom of its decline
manufacturing declined marginally and remains soft
home price growth remains on an improving trend line
consumer credit growth continues to decline
Employment growth continues to slow
transport continues weak and in contraction
| Release | Potential Economic Impact | Comment | |||||||||||||||||||||||||||
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| November Trade | looking at the inflation-adjusted numbers shows relatively little change from last month’s rate of growth | Trade data headlines show the trade balance improved with exports growth moderately improving. The 3-month average rate of growth declined for imports but improved for exports. Still if one looks at inflation-adjusted data, there was little change in the rate of growth for both exports and imports. Note that the headline numbers are not inflation-adjusted. Taking a step back and looking at inflation-adjusted data, there is very little change in growth for exports or imports year-over-year.
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| November CoreLogic Home Prices | n/a | CoreLogic’s Home Price Index (HPI) shows home prices rose both year over year and month over month. Home prices increased nationally by 3.7% from November 2018. On a month-over-month basis, prices increased by 0.5% in November 2019. (October 2019 data was revised.
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| November Manufacturing Sales | insignificant improvement | US Census says manufacturing new orders declined month-over-month. Our analysis shows the rolling averages insignificantly improved but showing no year-over-year growth. According to the seasonally adjusted data, it was defense aircraft and ships & boats that caused the decline in the headline data. The data in this series is noisy so I would rely on the unadjusted 3 month rolling averages which improved from contraction to no growth. What should be concerning is the continual reduction of backlog/unfilled orders this year.
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| December ADP Employment | n/a | ADP reported non-farm private jobs growth at 202,000 which was well below expectations. A quote from the ADP authors:
This month the rate of ADPs private employment year-over-year growth is below the tight range seen over 2019. The rolling average of the year-over-year rate of growth was the same as the previous two months. Last month’s employment numbers were revised significantly up.
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| November Consumer Credit | slowing credit growth affects consumer spending | The headlines say consumer credit rate of annual growth slowed relative to last month. Our analysis of the unadjusted data shows annual growth decelerated. Since May 2019, the unadjusted data showed a slowing of consumer credit growth each month. This slowing obviously is affecting consumer spending. Student loan year-over-year growth rate continues to marginally slow. Unadjusted Consumer Credit Outstanding
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| December BLS Employment Situation | soft growth continues | The headline seasonally adjusted BLS job growth was below expectations. The establishment and household surveys did not correlate well. Jobs growth in 2019 was the worse year for job growth since 2010. The trends are now showing a weakening employment picture. This is a significantly worse employment report than last month.
Year-to-date unadjusted employment growth is 597,000 people below the pace of last year – and the worst year-to-date growth since 2010.
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| November Wholesale Sales | growth slowing trend in play but wholesale not counted by GDP | The headlines say wholesale sales were up month-over-month with inventory levels remaining very elevated. Our analysis shows an improvement in the rate of growth for the rolling averages which remain in negative territory. The headlines say wholesale sales were up month-over-month with inventory levels remaining very elevated. Our analysis shows an improvement in the rate of growth for the rolling averages which remain in negative territory. This data set is considered an outlier and may have issues with data gathering, changing dynamics of the wholesale industry, or definition issues with what is considered wholesale.
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| Surveys | services surveys modestly improved | ISM and Markit Manufacturing Survey – The ISM non-manufacturing (aka ISM Services) index and the Markit PMI Services Index continued their growth cycle with both indices improving modestly. Both surveys are showing moderate growth.
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| Weekly Rail Transport | Definitely not positive news | Rail so far in 2019 has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the year-to-date has slipped into contraction.
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Links To All Of Our Analysis This Past Week
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