Tag Archives: consumer spending

Retail Sales and Producer Prices Go Up

Following three slow months, retail sales jumped 1.1% in March. According to the Wall Street Journal, “Retail sales increased 1.1% last month… the reading was the best monthly gain since September 2012”. Strong retail sales, which are an important piece of U.S. consumer spending, could be an indication of accelerating economic growth. The healthy pickup in consumer spending suggests that weaker spending in recent months was an outlier likely due to severe winter weather.

The automotive component of retail sales led the rise with an increase of 3.1%, which reflects a significant jump in new vehicle sales. According to the Wall Street Journal, “March auto sales, as measured in dollars, rose 3.1% from the prior month. That was the best gain in a year and a half”. Purchasing a new vehicle can be a big investment. Thus, many households make use of auto loans. As a result, the increase in auto sales might also reflect improvements in private credit markets. The availability of credit plays a central role in the booms and busts of business cycles.

In addition to auto sales, other components of retail sales were also solid. According to the Wall Street Journal, “Spending also improved at general merchandise stores, restaurants and nonstore retailers, which includes online shopping… Excluding automotive purchases, sales advanced 0.7% in March, above the forecast 0.4% gain”. Retail sales beat expectations even without including the large contribution by auto sales. I think it is good that the surge in retail sales were well distributed among several different areas rather than being highly concentrated in one (i.e. auto sales). The strong retail sales in March helped restore my confidence in the economic recovery following the weaker data in December and January. The severe winter weather seems to have caused December and January to be outliers among the stronger overall trend in consumer spending.

Retail sales are meaningful component of consumer spending, which is a significant piece of gross domestic product (GDP). According to the Wall Street Journal, “Consumer spending accounts for more than two-thirds of U.S. economic output. As such, expectations for stronger economic growth this year are largely pinned to shoppers’ wallets”. Due to strong retail sales in March, some economists have raised their projections for GDP growth in the second quarter. Consumer spending is a pro-cyclical component of GDP, which means it is positively correlated with GDP. If consumer spending picks up, then we should expect GDP to follow.

Another good sign for the U.S. economy is that producer prices increased 0.5% in March, which might predict a rise in U.S. inflation. According to the Wall Street Journal, “The producer-price index for final demand, which measures changes in the prices businesses receive for their goods and services, rose a seasonally adjusted 0.5% from February”. Although the producer-price index (PPI) is not the Federal Reserve’s preferred measure of inflation, the PPI is still a useful gauge of U.S. inflation. Considering the prolonged period of low inflation, I welcome the increase in the PPI and believe it might be a good sign for the U.S. economy. Furthermore, the 0.5% increase is a noticeable change as it is the largest gain in a single month since January 2010.

Not only does rising prices indicate inflation, it also reflects increasing demand. The increase in demand can also be seen in the strong March retail sales. I think the March employment report, which showed a hiring rebound after the winter slowdown, contributed to the rise in the PPI and the jump in retail sales. When you have a job you are able to spend more and increase your demand, which pushes up prices. The labor market is incredibly important and I completely agree with Janet Yellen’s emphasis on promoting job growth. A healthy labor market is an indispensable component of economic growth.

Inflection Point for U.S. Economy: And Perhaps the World

The United States economy seems to be at an inflection point in which growth will either accelerate above the trend or remain below. The March Employment report had some very positive signs, which showed that more people are finding jobs. According to the Wall Street Journal, “All of the gains came from private companies, which added 192,000 jobs. The March gain means the private sector has regained all the positions lost in the recession”. Although the 192,000 jobs added was just below forecasts, I think it is a strong number that proves the December and January employment reports were outliers that were negatively impacted by severe winter weather. The recovery has been painfully slow in the labor market, but the March employment report was a significant step in the right direction. The better level of hiring, as evidenced by the March employment report, will hopefully give a boost to consumer confidence and in turn support consumption expenditures.

According to Ray Dalio, credit expansion and credit contraction essentially determine booms and busts in economic business cycles. Following many years of expansion, the credit market collapsed in the recent financial crisis. Thus, the health of private credit markets is central to the current inflection point of the U.S. economy.

fredgraph_credit

As seen above, the year over year percent change in private credit has recently turned in the right direction. If credit markets continue to strengthen, households will be able to take on more leverage. An improvement in private credit conditions is indispensable to supporting the positive signs in the March employment report.

If the March employment report was so lovely and credit conditions are improving, then why the recent dip in financial markets? I believe changing expectations about future interest rates played a significant role. Expectations about interest rate increases are mid-2015 (i.e. 6 months following the end of quantitative easing) and there are concerns surrounding what the impact will be on each sector of the U.S. economy. On the one hand, financial stocks moved up on the news as they stand to earn more interest revenue from loans. On the other hand, sectors sensitive to interest rates (ex. Housing) will likely suffer when rates move up at first. For example, higher interest rates decrease affordability in the housing market and could potentially lead to decreased residential investment. A key rate to watch is the ten-year Treasury yield, which is usually considered the risk-free rate for long-term debt and is thus intertwined with many other rates.

fredgraph_10yr

The yield on the ten-year Treasury has tested 3%, but has remained below it. I believe it is only a matter of time before the 3% level is breached. As mid-2015 approaches, expectations about future rates will need to be fully priced in. As a result, a first test for the inflection point will be whether sectors that are sensitive to interest rates can handle higher rates. If all of this goes smoothly, then the United States economy could reach escape velocity and grow above the cyclical trend of 2.5%. Wonderful! Not so fast… According to the Wall Street Journal,

If the U.S. grows a half-percentage point faster than expected, it would force the Federal Reserve to raise interest rates at a quicker clip. That would boost borrowing costs for emerging markets more than many governments and investors planned, raising serious questions about the ability of countries, households and corporations to pay off their debts.

Although I am hoping for stronger economic growth in the United States, I was unaware that it might cause problems for the rest of the world. To be clear, the IMF is expecting the U.S. economy to expand at 2.8% this year and 3% in 2015. I am not sure how likely the U.S. is to grow above these levels, but I am very pleased by the signs in the labor and credit markets. Hypothetically, if U.S. economic growth takes off, then the Fed must respond quickly and effectively with higher rates despite a negative impact on the rest of the world. As the Fed demonstrated during the major sell off in emerging markets this year, the Fed’s mandate is the U.S. economy and so it must keep its focus here.

Italy’s “Disneyland of Food” (Revised)

When you think of a theme park, generally you think of roller coasters, waterparks, zoos, aquariums, and other attractions of the sort. In 2015, Italy plans to ditch the traditional theme park style and open up what will become the “Disneyland of Food”. With Italy being famous for its cuisine and culture, the theme park will feature nearly 125 restaurants, grocery stores, food courts, and learning labs. There will even be “live trees” where customers can pick their produce, as well as spaces for kids to play with food.

1

The graph above shows Italy’s gross domestic product growth rate for the past few years. As you can see, GDP expanded 0.1% in the fourth quarter of 2013, which was its first increase in 10 quarters. With this economic downturn that Italy has been facing, creating the world’s largest theme park dedicated to Italian food might just be what the economy needs. Despite the large funds that will go into the development of this project, revenues are expected to be around 86 million euros ($118 million). With revenues like this, the theme park could easily help Italy’s economy start to emerge.

The development of a theme park has different effects and consequences on the economy of the host region. For example, Italy’s “Disneyland of Food” is more aimed towards the potential benefit of creating jobs to ultimately spur consumer spending, creating an educational opportunity for children, and promoting their culture and cuisine. Not only will the park provide a fun way for tourists to get a taste of Italy, but it will also provide a learning experience for young children. With all these goals in mind, Italy has the hopes of attracting some of its yearly tourists to the city of Bologna as a way to boost GDP growth. The theme park isn’t necessarily something that a tourist would visit Italy specifically for; however, if you were already planning to visit Italy, it would be a great addition to the city of Bologna in terms of bringing in extra revenue from tourists looking to experience the culture and cuisine of Italy.

On the other hand, other theme parks such as Cedar Point are solely focused on bringing in revenue for their host city. Sandusky isn’t exactly a city that would attract tourists on its own so building what has become the roller coaster capital of the world was one way to boost consumer spending. Each year, millions of people from all over the world travel to Sandusky specifically to experience the thrill of Cedar Point. After a successful season last year, Cedar Point revenues went up 6%, reaching nearly a billion dollars in revenue. With revenues like this year after year, you can see why Cedar Point is such a huge asset to the economy.

Not only will Italy’s “Disneyland of Food” create thousands of new jobs, providing income to customers which will ultimately spur consumer spending and result in GDP growth, but as the president of the city of Eataly states, “It is an opportunity to show off Italy’s extraordinary biodiversity of resources.” “And to help push us towards our economic potential.” With a little bit of advertising, I think Italy’s theme park of food will be a great effort to harness tourism in Italy to kick-start the economy by creating jobs and spurring consumer spending.

Italy’s “Disneyland of Food”

When you think of a theme park, generally you think of roller coasters, waterparks, zoos, aquariums, and other attractions of the sort. In 2015, Italy plans to ditch the traditional theme park style and open up what will become the “Disneyland of Food”. With Italy being famous for its cuisine and culture, the theme park will feature nearly 125 restaurants, grocery stores, food courts, and learning labs. There will even be “live trees” where customers can pick their produce, as well as spaces for kids to play with food.

Italy

The graph above shows Italy’s gross domestic product growth rate for the past few years. As you can see, GDP expanded 0.1% in the fourth quarter of 2013, which was its first increase in 10 quarters. With this economic downturn that Italy has been facing, creating the world’s largest theme park dedicated to Italian food might just be what the economy needs.

Despite the large funds that will go into the development of this project, revenues are expected to be around 86 million euros ($118 million). With revenues like this, the theme park could easily help Italy’s economy start to emerge. The development of a one-of-a-kind project is likely to attract tourists from all over the world. And, with tourism being one of the largest industries, it is likely to bring many economic, social, and environmental effects. First and foremost, this “Disneyland of Food” will create thousands of new jobs, providing income to customers which will ultimately spur consumer spending and result in GDP growth. In addition, a food-themed park will encourage Italy to preserve its traditional culture, history, and cuisine. This will not only help generate funding for maintaining its natural resources, but it will create a better cultural understanding for the city’s tourists. As the president of the city of Eataly states, “It is an opportunity to show off our extraordinary biodiversity of resources in this country.” “And to help push us towards our economic potential.”

Another key feature of this theme park that will create a social benefit to the economy will be the educational opportunity available. Not only will the park provide a fun way for tourists to get a taste of Italy, but it will also provide a learning experience for young children. The learning labs will provide plots of land to test and study different varieties of vegetables grown in the country. There will be classrooms available with the goal of “teaching at least 3 million students that pears do not grow on supermarket shelves.”

With a little bit of advertising, I think this theme park will be a great effort to harness tourism in Italy to kick-start the economy by creating jobs and spurring consumer spending.

 

Consumer Debt and the Economy (Revised)

Everyone has had that one credit card bill that they’ve opened up and cringed at the amount due. But how can such small purchases add up so quickly in only a month? Most people don’t realize just how much money they are spending when they use a credit card to buy their purchases. However, most of the debt in our country comes from consumer spending. Since consumer spending drives the economy and fuels nearly 70% of U.S. GDP, consumers must be in a sound financial position. If consumers become overburdened with debt, they will not be able to drive economic growth. The table below shows the total amount of household debt, total nominal GDP, total nominal disposable personal income, and the ratio of household debt to both GDP and disposable personal income; all the numbers are in billions of dollars:

econ

As you can see, over the past 30 years, U.S. consumers have increased both total household debt and the percentage of that debt relative to overall GDP and DPI. At some level, the total amount of debt can become so large that it can force consumers to slow their spending and thus begin to negatively affect the health of the economy. This is why in times of a recession, governments try to encourage consumer spending by lowering taxes and lowering interest rates. When consumers slow down their purchases, business’ profits are lowered which eventually lead to lay-offs; worsening the downward spiral. The more debt that is held, the less money is available to be put away in savings and reinvested in the economy.

After 2009, consumer debt began to slowly decline for the next few years. Recently however, since the beginning of 2013, Americans have been taking on debt at a rate not seen since the country spiraled into the Great Recession. Consumer debt increased in just the fourth quarter of 2013 by $241 billion, the largest quarter to quarter increase since 2007. Below is a graph of the quarter to quarter household debt balance since 2003 and its composition:

Household Debt 2013Q4A

This total debt balance was a combination of Americans boosting credit card balances, increasing borrowing to buy more homes and cars, and taking on more student debt. Balances on credit card accounts alone increased $11 billion during the fourth quarter, making it the third largest source of household indebtedness. Only the mortgage and student loan debt markets were larger.

You would have thought that after the chaos of the recession, we would have become better at keeping track of our debt. However, data shows otherwise. According to a survey released by Bankrate.com, 28% of Americans have more credit card debt today than they have in a savings fund. This means that over a quarter of Americans wouldn’t be able to pay off their debt even if they used their entire savings! But, despite consumers’ savings records, banks are loosening up their credit card limits to levels not seen since the recession. This easy access to credit along with low interest rates during boom years is what brings Americans to take on record levels of debt. This does not mean that we are on the road to a second recession however. Americans’ increase in household debt could actually have to do with increased consumer confidence in the economy as it relatively improves. Higher spending leads to more jobs and higher incomes, which ultimately leads to higher consumer spending. For consumers with extra money in their wallets, taking on more debt may not seem so risky. And, as we know, consumer spending puts the economy on a positive track.

So can this notion that “Americans are spending way too much” be curbed and should it be? Financial advisers offer several tips on how to stop spending so much money and get back on track financially. Two of these tips include tracking your cash flow and tapping into your feelings to restrain your urge to spend. There is a difference between needing something and wanting something, and budgeting helps you to see areas where you may be overspending. Therapist Nancy Irwin says that overspending tends to be a coping mechanism. “You need to find the underlying issue that is trying to be fixed by overspending and learn how to deal with it in a healthy manner. There is nothing wrong with keeping up with the latest trends or being indulgent from time to time, as long as the intent is in the right place.” There is a fine line between spurring growth and digging the nation deeper into an economic sinkhole if too many houses are burdened with debt. Before you hand over your credit card, you need to think twice. You should ask yourself what need you are trying to fulfill and if you are going to be able to pay it off when the bill comes in the mail.

 

Consumer Debt and the Economy

Everyone has had that one credit card bill that they’ve opened up and cringed at the amount due. But how can such small purchases add up so quickly in only a month? Most people don’t realize just how much money they are spending when they use a credit card to buy their purchases. However, most of the debt in our country comes from consumer spending: buying more than you can afford at the moment with the presumption that you will be able to pay it off later. Since consumer spending drives the economy and fuels nearly 70% of U.S. GDP, consumers must be in a sound financial position. If consumers become overburdened with debt, they will not be able to drive economic growth. The table below shows the total amount of household debt, total nominal GDP, total nominal disposable personal income, and the ratio of household debt to both GDP and disposable personal income; all the numbers are in billions of dollars:

econ

As you can see, over the past 30 years, U.S. consumers have increased both total household debt and the percentage of that debt relative to overall GDP and disposable income. At some level, the total amount of debt can become so large that it can force consumers to slow their spending and thus begin to negatively affect the health of the economy. This is why in times of a recession, governments try to encourage consumer spending by lowering taxes and lowering interest rates. When consumers slow down their purchases, business’ profits are lowered which eventually leads to lay-offs; worsening the downward spiral. The more debt that is held, the less money is available to be put away in savings and reinvested in the economy.

So can this notion that “Americans are spending way too much” be curbed? Financial advisers offer several tips on how to stop spending so much money and get back on track financially. Two of these tips include tracking your cash flow and tapping into your feelings to restrain your urge to spend. There is a difference between needing something and wanting something, and budgeting helps you to see areas where you may be overspending. Therapist Nancy Irwin says that overspending tends to be a coping mechanism. “You need to find the underlining issue that is trying to be fixed by overspending and learn how to deal with it in a healthy manner. There is nothing wrong with keeping up with the latest trends or being indulgent from time to time, as long as the intent is in the right place. It’s OK to keep up with the latest technology if you are into that or you enjoy giving your kids the biggest pool on the block as long as it comes from a creative place and serves your high consciousness and not just your ego.” There is a fine line between spurring growth and digging the nation deeper into an economic sinkhole if too many houses are burdened with debt. Before you hand over your credit card, you need to think twice. You should ask yourself what need you are trying to fulfill and if you are going to be able to pay it off when the bill comes in the mail.

Despite Signs of a Strengthening U.S. Economy, Investors Fly to Quality

At the expense of emerging markets, capital is finally returning to the United States. For example, a number of emerging market currencies have been steadily depreciating against the dollar. Why have investors decided to return to U.S. assets? Because the U.S. is showing signs that the recovery is gaining traction. Data released on Thursday 1/30/14 showed that fourth quarter gross domestic product grew at a seasonally adjusted rate of 3.2%. According to the Wall Street Journal, “A big driver of growth in the fourth quarter was a rise in consumer spending, which grew at 3.3%, the fastest pace in three years. Consumer spending accounts for roughly two-thirds of economic activity”. Consumer spending is an indispensible component of economic growth. I think increased business investment is likely to follow this strong consumer spending. With healthy amounts of business investment and consumer spending, future prospects for the U.S. economy look extremely bright for the first time in awhile! The Fed’s decision on Wednesday 1/29/14 to continue the taper was primarily based on the strengthening U.S. economy (it is also partially due to the fact that the Fed does not like using quantitative easing).

As the U.S. continues to strengthen and attract capital, where are investors putting their capital – the stock market or the bond market? The answer is the bond market, which is evidenced by climbing 10-year Treasury prices and falling yields (recall that prices and yields move in opposite directions). The decision of investors to enter the bond market represents a flight to quality. Government bonds are a risk free investment (the downgrade does not concern me at all). Despite the evidence of a U.S. economic recovery, investors still prefer to invest in the bond market. According to the Wall Street Journal, “Much of the surprise can be attributed to the sudden turmoil in emerging markets and worries about a slowdown in China’s economic growth, which have driven investors to investments perceived as safer, notably government bonds”. Struggling emerging markets and China’s slowdown understandably create concern for investors, which contribute to their decision to buy bonds over stocks. First, falling international markets can hurt U.S. portfolios with exposure to slowing growth in emerging markets as well as China. This could then hurt consumer discretionary spending. Second, coordinated growth would be much healthier for the global economy than one where some countries take from others. Although investors in developed countries might be pleased to see economic improvement in the U.S, the risks of contagion from emerging markets and globally induced deflationary pressures are valid reasons for concern.

Nonetheless, the flight to quality comes as a surprise. I, for one, expected yields to rise as the Fed tapered. Tapering means decreasing Fed demand for bonds and falling demand causes prices to fall and yields to rise. Moreover, the fall in yields goes against the intentions of the Fed’s decision to taper. As the U.S. economy improves, the Fed wants yields to begin rising. Quantitative easing was initially implemented to lower long-term interest rates. Now, the Fed intends to let interest rates slowly increase through tapering.

In any case, I do not think rates are going to continue going lower indefinitely. The flight to quality only makes sense as long as investors are worried about something. According to the Wall Street Journal, “Some investors and strategists said they believe rates will end the year higher, but agree there may be room in the interim for them to dip lower than previously thought”. I agree and think that we will ultimately see rates rise, however, I am not sure when.

Two Faces of Recent and Future Consumer Spending

Consumer expenditure makes up about two thirds of the gross domestic product in the United States each year. With this in mind, it’s fairly obvious that the state of the economy is essentially in sync with consumer spending, for better or for worse. This can be a very good thing when consumers have lots of money to spend as the economy would be in great shape. In the final quarter of 2013, GDP grew by 3.2% (seasonally-adjusted rate) while consumer spending grew at a rate of 3.3%, clearly a large driver of the fourth quarter growth. The second half of 2013 actually saw the strongest growth since 2003, when the economy was flourishing. Recently, there has been a rise in consumer confidence, people are spending more, and in order to meet this increased demand, suppliers have been ramping up production. Evidently, this is good for the condition of the economy.

On the other side of the coin lies the possibility that consumer spending is going to take a hit and slow down due to slow income growth this year. If people are not making an increased amount of money, how can we expect them (us) to continue to spend more and more money?

The income figures “raise a degree of caution for the near-term outlook because some pullback in spending growth seems likely,” said Scott Brown, chief economist at financial firm Raymond James & Associates Inc. “We came into the year priced for a strong recovery, and now it looks like it might stumble a bit.”

This is certainly a cause for concern about the economy and its continued recovery. As slow and weak as it has been, the recent increase in consumer spending has been reason for optimism looking forward; but now we might take a step backward. 

That being said, the likelihood that slow income growth will stifle consumer spending is not set in stone. The increase in consumer spending towards the end of 2013 came with flat incomes in the month of December. Also, even if incomes do not grow in the near future, people can always save just a little bit less or hold off on repaying debt for the time being in order to sustain their higher amounts of spending. “The personal saving rate fell to 3.9% in December from 4.3% in November.” So clearly there are things that we (the consumers, or at least some consumers) can do, and have already started to do, in order to continue spending. It is extremely important to the continued recovery of our economy that consumers keep on spending at increased levels, and while this may not be easy to do, it can certainly be done. It will be interesting to see the growth levels of the economy and consumer spending several months from now. Hopefully any slow income growth that the country faces will not be the be-all and end-all to sustained growth in consumer expenditures going forward.