Well, the "Super Tuesday" gig worked for yet another week, albeit modestly. Macro Man has therefore updated his chart accordingly. Astute readers may have detected something of a theme running through yesterday's set of questions, a theme that has been preying upon his mind in recent weeks: w(h)ither the US consumer?
It is taken almost as axiomatic by some of the lazy sunbathers that the consumer will enjoy a splendid spring (should it ever bother to arrive) following the long, cold winter. To be sure, some of the banks with a strong retail presence have duly noted an uptick in credit card spending, which likely indicates some sort of bounceback. But how durable is such a consumption uptick, anyways?
Generally speaking, consumer spending is driven by two factors: disposable income and wealth. Indeed, a simple model utilizing those two factors generates almost absurdly high r-squareds. Macro Man developed the model below in 2006; as you can see, the out-of-sample result remained incredibly robust through a pretty turbulent period.
The upshot, therefore, is that to get a handle on the trajectory for consumption we need to get a handle on income and wealth dynamics. It is in these areas that Macro Man has a few concerns.
On the income side, the news is ostensibly pretty good. Payrolls are expanding at a solid pace, which may even uptick to "brisk" come Friday. As has been noted around the street, wage growth is slowly starting to rise as well, which should augur well for spending growth. Perhaps it will. However, Macro Man has learned to beware of the impact of gasoline prices, and he himself had one of those "it's how much per gallon?" moments last time he filled his tank. Upon checking, he saw that yes indeed, gas prices are in fact at their highest levels in more than a year, and rapidly approaching the point where consumption has taken a hit.
What about wealth? Similar to consumption, a lot of the growth in household net worth can be explained by two factors: stocks and house prices, even though those these represent a minority of the assets in household balance sheets. As you can see, the model has done a pretty solid job of calling the rise in household net worth (though as the first chart suggests, it hasn't really been enough to spur robust consumption.)
Obviously equities remain up on the year, though whether they end that way in the face of the Taper is anyone's guess. No, it's housing where Macro Man has his worries, because despite the ostensibly happy news from the Case-Shiller index (prices up 12.9% y/y!), activity looks like it's falling off a....well, if not a cliff, at least a moderately high garden wall. Unsurprisingly, this was foreshadowed by the 1% rise in 30 year mortgage rates resulting from last summer's Taper Tantrum.
Now, perhaps it is possible for home prices to continue to climb in the face of declining activity....but that looks like a sucker's bet. By the same token, it is certainly possible for mortgage rates to come back down sufficiently to re-stoke demand (hence yesterday's question)...but on what catalyst? It's not as if there is no demand for no mortgage paper...quite the contrary. There is just no real origination- the MBA purchase index is down 18% y/y, while the refi index is down an eye-watering 70% y/y.
So while the price index says that housing is OK, the ancillary indicators suggest that it isn't really making too many people feel much richer these days...thus representing another risk to the bullish consensus.
Does all this mean that the US consumer's about to roll over and play dead? Not necessarily- merely that there is a risk that the rebound is not nearly as robust as anticipated. Of course, once the Professor gets wind of the situation, he may send his agents of financial repression into overdrive. Unfortunately, this is what a lower trend growth economy looks like. While it certainly supports the notion that terminal rates should and will be lower than historical norms, from Macro Man's perch it does not necessarily follow that any potential lift-off of the policy rate should be delayed indefinitely. Indeed, to do so would just invite another pas de deux in the danse macabre between housing activity and mortgage rates.
And of course, failure to lift off would leave relatively little room for maneuver when the consumer finally does wither.
It is taken almost as axiomatic by some of the lazy sunbathers that the consumer will enjoy a splendid spring (should it ever bother to arrive) following the long, cold winter. To be sure, some of the banks with a strong retail presence have duly noted an uptick in credit card spending, which likely indicates some sort of bounceback. But how durable is such a consumption uptick, anyways?
Generally speaking, consumer spending is driven by two factors: disposable income and wealth. Indeed, a simple model utilizing those two factors generates almost absurdly high r-squareds. Macro Man developed the model below in 2006; as you can see, the out-of-sample result remained incredibly robust through a pretty turbulent period.
The upshot, therefore, is that to get a handle on the trajectory for consumption we need to get a handle on income and wealth dynamics. It is in these areas that Macro Man has a few concerns.
On the income side, the news is ostensibly pretty good. Payrolls are expanding at a solid pace, which may even uptick to "brisk" come Friday. As has been noted around the street, wage growth is slowly starting to rise as well, which should augur well for spending growth. Perhaps it will. However, Macro Man has learned to beware of the impact of gasoline prices, and he himself had one of those "it's how much per gallon?" moments last time he filled his tank. Upon checking, he saw that yes indeed, gas prices are in fact at their highest levels in more than a year, and rapidly approaching the point where consumption has taken a hit.
What about wealth? Similar to consumption, a lot of the growth in household net worth can be explained by two factors: stocks and house prices, even though those these represent a minority of the assets in household balance sheets. As you can see, the model has done a pretty solid job of calling the rise in household net worth (though as the first chart suggests, it hasn't really been enough to spur robust consumption.)
Obviously equities remain up on the year, though whether they end that way in the face of the Taper is anyone's guess. No, it's housing where Macro Man has his worries, because despite the ostensibly happy news from the Case-Shiller index (prices up 12.9% y/y!), activity looks like it's falling off a....well, if not a cliff, at least a moderately high garden wall. Unsurprisingly, this was foreshadowed by the 1% rise in 30 year mortgage rates resulting from last summer's Taper Tantrum.
Now, perhaps it is possible for home prices to continue to climb in the face of declining activity....but that looks like a sucker's bet. By the same token, it is certainly possible for mortgage rates to come back down sufficiently to re-stoke demand (hence yesterday's question)...but on what catalyst? It's not as if there is no demand for no mortgage paper...quite the contrary. There is just no real origination- the MBA purchase index is down 18% y/y, while the refi index is down an eye-watering 70% y/y.
So while the price index says that housing is OK, the ancillary indicators suggest that it isn't really making too many people feel much richer these days...thus representing another risk to the bullish consensus.
Does all this mean that the US consumer's about to roll over and play dead? Not necessarily- merely that there is a risk that the rebound is not nearly as robust as anticipated. Of course, once the Professor gets wind of the situation, he may send his agents of financial repression into overdrive. Unfortunately, this is what a lower trend growth economy looks like. While it certainly supports the notion that terminal rates should and will be lower than historical norms, from Macro Man's perch it does not necessarily follow that any potential lift-off of the policy rate should be delayed indefinitely. Indeed, to do so would just invite another pas de deux in the danse macabre between housing activity and mortgage rates.
And of course, failure to lift off would leave relatively little room for maneuver when the consumer finally does wither.
7 comments
Click here for commentsLike the new layout and thanks so much for coming back, love your writing and analysis :)
ReplyI would just suggest that you try a slightly darker grey for the font.
All the best
No wonder MM had a "how much a gallon" moment if he drives a tank :).
ReplyC Says
Replyregarding both consumer spending and housing this appears to me to be the most complex situation we have seen in a post-boom recovery in my adult life.
In a superficial sense quite a lot of the data coming through has looked positive on the surface ,but doesn't look like that when you start drilling down.
For example ,what kind of recovery in spending are you going to get when the numbers employed is going up ,but are increasingly weighted to a slide down the pay scale and are contractually tenuous?
What does a rise in prices mean for property when you account for Institutional activity to a higher degree than the norm camouflaging the lack of retail buying. Again ,how much of the latter is to do with the change I their employment circumstances ?
I don't want to get into the inequality argument here ,but let me put it this way. Exactly how much of the benefits from this post 2008 have filtered down into the mass population group that would enable then to reset the trend in consumption and housing?
I have my own ideas about that which keep me firmly in the cautious corner.
Lowest U.S. wage growth in over 30 yrs RT @JeoffHall: Unrounded (0.253%) Q1 gain in Employment Cost Index is lowest in index's 32-yr history
Replyhttps://twitter.com/ReutersJamie/status/461493127325302785
GDP +0.1% in Q1, near-recessionary conditions, which reflect the middle class "real feel" economy that some of us see in real life. Now we know what it is that the yield curve has been trying to tell us.
ReplyMust concur with C's comment's re "benefits... post 2008 (to)... the mass population that would... reset the trend in consumption and housing" and Leftback's take on "the middle class 'real feel' economy". The entirety of the CBs vast stimulus since 2008 has by and large neatly gone round the consumer, instead ending up in the TBTF reserves at the Fed.
ReplyThis boomer believes that the "consumer recovery" will continue to be tepid in the long haul, moderated by a significant aversion to open-handed consumption.
While some boomers' retirement savings rebounded with the markets, on the whole my generation is ill-prepared for retirement. Witness the continued advance in the age of retirement, at an all-time high of 62 years in the U.S. according to this morning's news report.
Despite the retirement savings rebound, there is little concomitant wealth effect to be seen, but au contraire, a heightened sense of restricting large purchases to new necessities. Hearing aids @$4000 per pair, anyone? $11,000 replacement HVAC system in a 50-year old, 3-bedroom/1-bath ranch house?
The middle class consumers who do have them are conserving limited resources for expected longer life spans.
Meanwhile our college grad, 20-something kids are lucky to find service industry employ by which they can afford rents and groceries, plus the newly mandated "affordable" health insurance premia. No new household formation boom there.
Having aided in her post-college struggle by providing an auto and insurance, mine own kiddoh will soon be all on her on ownsome when Dad retires (closer to 70 than 62!) and has to curtail significantly such outlays.
PS - the new font is quite fuzzy, dim and fatiguing to these old(er) eyes. Compare to the crisp look of the text in these Comments.
Re: Fuel prices.
ReplyI expect this is part of your calculus, and perhaps the trends involved haven't progressed enough to matter yet, but looking only at the price at the pump can overstate the bite on discretionary spending, imo. The secular downshift in miles driven plus the secular rise in fuel economy would seem to mitigate the gas-price hit to the macro pocketbook of the Consumer.