Topics4126 Posts4171By New_Deal_democrat February 14, 2017 10:27 am
- XE Contributor
The consumer fundamentals nowcast
Ultimately I have four separate methods for monitoring the business cycle, which should give concordant signals.
The first is Prof. Geoffrey Moore's system of long leading indicators, to which I have added several other metrics that usually turn one year or more before the end of an expansion.
The second is the Conference Board's Index of Leading Indicators, which is a shorter term system, and which generally overlaps with Prof. Moore's short leading indicators.
The third is my rundown of Weekly Indicators, which while more noisy and less comprehensive, gives a good up-to-the-present read on a gamut of long and short leading and coincident indicators.
The fourth is a fundamental look at consumers' health. That's what I am updating in this post.
Almost 10 years ago I wrote "Are Hard Times Near? The great decline in interest rates is ending." The theory is that if real average wages are not increasing, which for a long time beginning in the 1970s they were not, average Americans use a variety of coping mechanisms. From the 1970s through the mid-1990s, spouses entered the workforce, adding to total household income. Other methods have included borrowing against appreciating assets, and refinancing as interest rates declined.
Borrowing against stock prices ended in 2000. Borrowing against home equity ended in 2006. When interest rates failed to make new lows, the consumer was tapped out, and began to curtail purchases. Thus in September 2007, with the stock market peaking, house prices falling, interest rates having not made new lows in over 3 years, and real wage growth having stalled, I wrote that a recession was about to begin:
As we all know, less than 3 months later a recession did indeed begin, and its effects on consumers have largely lingered ever since. Hard Times were indeed near.
I last updated this look at consumer health last year, suggesting that increasing inflation would erode wage growth. That it has now done. For the last 10 months, real wages have failed to grow significantly at all. Here's the long term look:
With the exception of the 2000 recession, consumers' real wage growth has stalled before each recession. Here is the same metric measured YoY:
Note that YoY real wage growth has declined almost, but not quite, to zero. A complete stall looks like at least a 50/50 proposition over the next several months.
Next, note that mortgage interest rates have not made new lows since 2013:
As a result, refinancing is at its low ebb:
This source of coping has dried up.
The real savings rate -- that is, the personal savings rate compared with inflation -- tends to decline by 5% or more midway or in the later part of expansions. Consumers react to increasing inflation by saving less. When that reaches a point where consumers are unable or unwilling to save even less, the recession begins. Note that this has been in a steep decline over the last year, but not near a 5% decline yet:
If the rate of inflation continues to increase, this is also likely to meet the 5% threshold by the end of this year.
But so far, asset price growth for both houses and stocks is continuing:
So even if other sources of spending are tapped out, cashing in equity gains is available for now.
When all sources of increased spending have disappeared, consumers become cautious and cut back at least slightly on their debt loads, signaling that a recession is beginning.
This has been going sideways for the last several years.
So the consumer fundamentals nowcast indicates that the expansion should continue for awhile, but if inflation eats up wage gains and the savings rate this year, then all we will need for the consumer to signal a recession is for asset prices to peak. I do not think that will happen until at least next year.
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