It’s no secret the US economy keys off consumption. On that count, it’s beginning to look less and less like an expanding economy. Whether it’s the internals of the first-quarter GDP report or the source of March personal spending, the trend is not the friend of growth in coming months.
Some of it comes down to the state of US workers’ paycheques. Adjusted for inflation, personal income excluding government transfers peaked in December and has declined at a 3 per cent annual rate over the past three months. That helps explain consumption’s punk 0.8 per cent contribution to first-quarter GDP, the lowest in a year.
Digging into March’s personal spending data, the headline once again belied strength. On the surface, spending of 0.9 per cent was as robust as it gets even after adjusting for inflation, which took it to 0.7 per cent. Net out the biggest savings drawdown in six years, however, and you arrive at a decline of 0.2 per cent for March.
As for what’s pushing households to tap into their rainy-day funds, Deutsche Bank recently pointed to the 15 per cent year-on-year increase in household interest payments. Levels of payments rising at a similar pace preceded the onsets of the last two recessions.
Is it any wonder credit-card issuers are bolstering their cushions to absorb future losses? And it’s not just Capital One that caters to lower-credit quality borrowers. All seven of the largest US card issuers boosted their charge-off rates in the first quarter to an average of 3.82 per cent, an almost seven-year high.
Mortgage lenders are reporting similar strains. According to Knight Black’s latest Mortgage Monitor, a typical first quarter sees the national delinquency rate decline by 15 per cent as borrowers use tax refund proceeds to catch up on their household finances. The first three months of 2019, however, marked the smallest drop in delinquency rates since 2009.
It’s almost as if the tax cut never happened.
While that’s a bit of a stretch (there’s no denying the bump to take-home pay for millions of Americans) 2019’s tax season was nevertheless been a shock of historic magnitude to household budgets. Add up what Uncle Sam did not pay out in tax refunds and how much more households paid up in income taxes vis-A -vis 2018 and you arrive at $29 billion.
While that figure may not seem sufficient to move the needle, it was likely a surprise to households. That’s $29 billion less in the way of splurging or righting your financial ship, depending on the circumstances. Either consumption takes the hit or households that had planned on catching up remain uncomfortably in arrears.
One way to fortify fragile finances is refinancing a mortgage to reduce monthly payments. The March decline to 4.06 per cent in 30-year fixed mortgage rates, almost a full percentage point lower than 2018’s highs, sent homeowners swarming to lenders with refinancing activity up 58 per cent over the prior 12 months. Three short weeks later, rates had edged up by a tenth of a percentage point, sufficient to slow the year-on-year rate increase in refinancing activity to 11 per cent.
Accentuating households’ sensitivity to the slightest moves in borrowing rates, Knight Black noted that the recent low in rates increased the pool of mortgages eligible for refinancing by 1.6 million in a single week to 4.9 million. As per the Mortgage Monitor: “Rates bumped up less than one-eighth of a point and knocked one million of those folks out of the running.”
Looking forward, TS Lombard Chief Economist Steven Blitz notes that two-thirds of April’s new jobs were generated in lower-wage services industries such as administration and support services, health and social services, leisure and hospitality, among others. The flip-side of this dynamic is that high-paying job growth has been nearly halved to 1.6 per cent since peaking in 2015.
Little wonder that according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, banks tightened lending standards for credit cards in the first quarter. This belt-tightening should come as no surprise given the four largest US banks booked $4 billion in credit card charge-offs in the first quarter. That compares to $656 million across all other consumer loans, representing the widest gap since at least 2009.
The economy may be going gangbusters as job gains defy estimates, but something is amiss in the household sector, the driving force behind the world’s biggest economy. The Fed may want to look beyond the headlines before making its next “solid” assessment of the economy backed by a labour market that “remains strong.”
Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of ‘Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,’ and founder of Quill Intelligence.
