Cautious Consumer Spending Has Analysts In Quandary
Weak consumer spending this year has left Wall Street analysts and the financial media looking for explanations especially stocks have marked record highs.
Here is the reason: the financial crisis of the past decade left a lasting effect on American consumers who are saving their money instead of borrowing and spending.
The Great Depression birthed a generation of conservative spenders, and the Great Recession has caused some serious caution. The illusion that ‘home prices never go down’ cracked and shattered, along with faith in a more stable business cycle and belief in a reliable retirement system.
The collapse of the housing bubble, which belied former Fed Chairman Ben S. Bernanke’s statement in Y 2005 that “we’ve never had a decline in house prices on a nationwide basis,” triggered the deepest recession in 80 yrs.
Unemployment rose to a 30-yr high of 9.9% and the home ownership rate fell as more than 5-M households fell behind on monthly mortgage payments.
The American consumer unwillingness to spend is evident in the data on retail sales excluding gasoline and cars, which fell to a 0.2% annual rate from December to April from 3.3% in Y 2014, according to the US Census Bureau. Wage and salary income has grown 4.8% from a year earlier, and the personal savings rate has stayed above 5%.
Consumer thrift defies economic forecasts that are based on the (now in the scrapbook) spending habits of the baby-boom generation.
Starting in the late 1970’s the baby boom generation started to replace the Great Depression generation as the dominant income and spending group, a number of things were going, one was the ‘wealth effect.’ Rising asset values convinced people that they did not have to save to accumulate net worth, aka wealth.
Applying the economic models of that era can lead to significant overestimates of how consumer spending will react to rising home values, equity markets and employment now.
The models want consumption to boom, driving down the saving rate, but the actual saving rate shows no clear trend according to the data. This is notable since Y 2012, when the housing market joined the stock market boom. That means that greater consumer caution has offset the normal wealth effect.
Savings trends are expected to be clearer later htis year, as consumers respond to changes in wages, work hours and gasoline costs.
The Bank of America (NYSE:BAC) forecast assumes that there is a lagged response to the fall in gasoline prices, and consumption will reaccelerate, causing the saving rate to drift back down from 5.6 to 5%.
But let’s not forget that 93-M people in the nation are not working now.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
The post Cautious Consumer Spending Has Analysts In Quandary appeared first on Live Trading News.