The Surprising U.S. Consumer
Pessimists take note: Despite lackluster jobs data, the consumer is in better shape than many think.
by Milton Ezrati, Lord Abbett
Amid the country’s diverse economic problems, it is easy—too easy, frankly—to look at the dark side of everything. However much material there is on that unattractive side of the ledger, people should not lose sight of the positive developments. Especially where the American consumer is concerned, matters, if still far from universally robust, have improved markedly during the last four years. With consumption at some 70% of the economy, that improvement raises serious doubts about today’s popular and sometimes extreme pessimism, especially the frequent and easy forecasts of another recessionary dip.To be sure, the poor jobs market raises all sorts of legitimate questions about the resilience of the consumer sector and, consequently, the entire cyclical recovery. At last measure, the Labor Department reported that people on nonfarm payrolls totaled just 133 million. Though a gain of over 4 million from the lows reached during the 2008–09 recession, the current state of affairs still speaks to a subpar recovery in which net new jobs growth has averaged barely over 100,000 a month, not even one-third the average of the typical recovery. After more than three years of recovery, the economy remains some 5 million jobs short of its previous peak.
But if jobs growth is disappointing, not the least for the millions without work, it is far from the whole story on the consumer. Because American industry has relied inordinately in this recovery on overtime and on upgrading of workers’ skills, it has helped the spending power of the more than 90% of the workforce who have jobs, even as it has frustrated job seekers. Overtime in particular has expanded the average work week in the private economy to almost 35 hours from 33 during the recession. Because for many those extra hours earn at time and a half, it is hardly surprising that average weekly earnings have risen in tandem and by a whopping 36% above pre-recession levels. Accordingly, personal income in general has risen much faster than the raw employment figures would suggest. Wage income in the private economy, for instance, has expanded at an annual rate of more than 4.5% so far this year, despite the paucity of hiring.
But consumer spending has more than just income as a support. During the past few years, households have also reduced many encumbrances on their income flow. In particular, debt-service obligations have fallen to slightly more than 16% of aftertax income, well down from the almost 19% they averaged just before the recession and even from the 16.4% registered a year ago. Indeed, today, such obligations stand at lows not seen since 1993. The relief has effectively given households budgets an added fillip above what they got from wage growth, about half a percent during the past year and more than 2.3% since this recovery began in 2009. This improvement, too, helps explain why consumer spending has expanded, despite subpar employment growth, and can continue to do so, even if the jobs picture continues to disappoint.
Offering further relief to the household finances and so supporting consumer spending has been the drop in debt charge-offs. According to the Federal Reserve, some 1.24% of the total loans and leases were charged off in the first quarter of 2012 (the most recent period for which complete data are available). A year ago, charge-offs ran at 2.27%, and they peaked at more than 3% late in 2009. Improvement has occurred in mortgages, where charge-offs have fallen from a peak of 2.8% in late 2009, to 1.44% most recently. Credit cards have shown the most progress. There, charge-offs have dropped from a peak of 10.26% in late 2009, to 4.25% most recently. Though none of this improvement necessarily puts money in the consumer’s pocket, it has lifted a cloud of fear that no doubt has encouraged easier spending.
The drop in gasoline prices does, however, effectively put money in the consumer’s pocket. Since last April, when gasoline broke above $4.00 a gallon in much of the United States, the price has fallen on average by some 65 cents, or almost 16%. Since the average American spends between 8–9% of his or her household budget on gasoline, the price decline has effectively freed up an additional 1.4% for general consumption. Though the figure may seem small, stated in this way, when taken across all household budgets, it equates to some $160 billion. Put another way, it is the equivalent of a 1.2 percentage-point drop in average income tax rates. So far, this relief has not appeared in consumer spending measures, except as a drop in nominal spending on gasoline. It almost certainly will boost general spending flows.
None of this, however, points to a boom in the consumer sector or elsewhere in the economy. Employment gains remain an important consideration and so far a source of weakness in the growth equation. Neither do these observations stand as proof against adverse shocks. But the improvement in household finances and in cash flows does nonetheless warn against this environment’s great temptation to see matters in an entirely negative light and against the easy forecasts of impending recession that inevitably emerge from such sentiments.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
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