Record High Debt and Slowing Incomes

Record High Debt and Slowing Incomes

With the holiday season upon us and the markets eager to see just how much Americans are will to spend this year, let’s take a look at just how much they can spend. Increases in spending are made possible by just two things:

  • An increase in income
  • An increase in borrowing

Today’s employment report gives us some insight into the direction in income levels as the 3-month moving average for hourly earnings for the 80% of the population included in the production and non-supervisory data shows that earnings continue to be on the decline, despite an unemployment rate that is the lowest we’ve seen since 2000.

Taking a step back and looking at the bigger picture it is easy to see why so many in America feel the American Dream is no longer attainable. The year-over-year increase in average hourly earnings for the 80% of the workforce included in the production and non-supervisory category have declined from an average of 7.0% in the 1970s, to 4.5% in the 1980s, to 3.2% from 1990 to 2007 to 2.1% from 2010 to today.

As for borrowing more to pay for purchases, Total Consumer Credit (excluding borrowings for real estate purchases) as a percent of Disposable Income has reached a new high.

 

We’ve also seen Consumer Confidence back near multi-year highs.

 

However, the savings rate has been falling and is near 10-year lows.

Historically, when the spread between these two peaks, the year-over-year rate of growth in spending declines.

The bottom line is the soft data, such as Consumer Confidence levels, are not what allows for increased spending. With revolving credit levels as a percent of disposable income reaching record levels and the trend in earnings on the decline, sustained increases in spending are simply not possible.

Markets and auto sales in reverse

Markets and auto sales in reverse

Last week the S&P 500 lost 1.4 percent, the largest weekly loss since the week before the election. No wonder investors pulled $9.1 billion net out of mutual funds, resulting in the steepest weekly redemption rate since last June’s Brexit freak-out. This move reverses about 10 percent of the some $90 billion of inflows since the election as the Trump Trade loses steam in the face of weakening hard data. When we look at what happened in March versus January and February, we can see how investors could get spooked.

In January and February, most everything was moving up, save for the energy sector.

XLY Chart

By March sector performance has shifted around significantly, with most every sector now in the red for the month.

XLY Chart

 

Looking into the details a bit, we see that the 50 stocks in the S&P 500 with the largest exposure to domestic sales fell 4.2 percent in March while those with the most global exposure were flat – a stark contrast from the earlier narrative of deregulation and protectionism which boosted small cap stocks with a heavy domestic focus. We are also seeing a move back into quality and liquidity with the largest 50 companies in the S&P 500 outperforming the smallest 50 by 3.6 percent in March. We’re also seeing more defensively positioned companies, like real estate investment trusts (REITs) and other dividend stalwarts come back into favor.

Aside from equities, we’ve seen bond yields cease their upward climb as the dollar has rolled over and even the Mexican peso is now up 15 percent year-to-date in an apparent refutation of a NAFTA rethink. While the mainstream financial media may be jawboning about growth that is right around the corner, core capital spending orders are flat year-to-date and up all of 1.3 percent year-over-year from 2016’s painfully depressed levels.

For all that talk of the consumer in a giddy mood with the Michigan Consumer Confidence Index hitting a record high, real consumer spending just experienced its worst three-month rate of change since 2012.

Oh and remember how we’ve been hammering about how if things are oh so rosy why is the auto sector having a rough go of it? Well, it just got rougher. With about 80 percent of the auto industry reporting so far this morning, sales are tracking to be coming in at the lightest pace in almost three years. So much for accelerating spending.

  • Honda (HMC) started the reporting off with a miss, down 0.7 percent. This miss is particularly painful as March 2017 has a more favorable sales calendar and day trade adjustment than 2016.
  • Nissan (NSANF) and Mazda (MZDAF) did better, up 3-5 percent year over year.
  • Ford missed big time, down 7.2 percent year over year versus expectations for 5.9 percent decline.
  • GM (GM) missed estimates as well, up 1.6 percent versus 7 percent expected.
  • Fiat-Chrysler (FCAU) missed with a 5 percent volume drop versus expectations for roughly no change.
  • Toyota (TM) sales in the U.S. fell 2.1 percent.

Our Cash Strapped Consumer may be feeling better, per sentiment surveys, but they certainly aren’t out buying and unless we see some real wage gains or (and this is decidedly not a long-term solution) consumer credit starts flowing more freely, spending can’t get much more robust. In many respects these sentiment and confidence surveys are like watching a person consume an excess amount of alcohol – at one point they are feeling great and all is well with the world, but it’s only a matter of time before they are reaching for Drinkwell, Alka Seltzer and other hangover remedies as they contend with the next day’s reality.