Because American consumers kept spending, in the face of 9 quarters of negative savings, falling housing prices, rising interest rates, rapidly increasing food and energy costs, and decelerating GDP growth, many economists appeared to believe they could continue to defy gravity.
This MarketWatch story’s subtitle, “Signs of household stress are all around.” confirms that reality is taking its toll:
Just when it appeared the U.S. economy would pick up steam after a year-long soft patch, the U.S. consumer is running out of gas.
The signs of stress are all around.
Prices are rising, but incomes and wealth aren’t. With most households already overburdened with debt, consumers are being squeezed. There’s only one thing to do, even though it goes against every fiber of their being: Cut back on expenses.
Realtors are feeling it, retailers are feeling it, and so are automakers and bankers.
Consider this news from Tuesday:
Sales at retail chain stores continued to weaken in the last week of June. The International Council of Shopping Centers index barely grew week-over-week, while the Redbook index fell to a cyclical low, with same-store sales up just 1.2% compared with a year earlier.
Vehicle sales declined for the sixth straight month in June. In the past six years, sales have been weaker on only two occasions. At the same time, the automakers have stepped up their production, setting up the industry for another round of layoffs and production cutbacks.
Home sales fell again in May. The National Association of Realtors said the number of contracts signed on previously owned homes fell 3.5% to the lowest level since the recession.
More consumers fell behind on their debt payments in the first quarter. The percentage of loans that were 30-days past due rose to the highest level since the recession of 2001.
The news in prior weeks hadn’t been much better:
Home prices fell 2.7% in the past year, the biggest decline in 16 years. A 2.7% drop may not seem like much, but considering how hard it is to get homeowners to accept less than they paid for their house, it’s startling.
Homebuilders got even more depressed about their industry. The housing market index fell to a 16-year low.
Delinquencies on home mortgages are rising, especially for subprime loans. Unfortunately, delinquencies and foreclosures are also rising for borrowers with good credit who took out adjustable-rate loans. That’s unheard of when the unemployment rate is under 5%.
The stock market, after a nice run up from March to May, has been flat over the past seven weeks.
Consumer prices rose 0.5% in May, the fastest monthly increase in 17 months.
Real take-home income (that is, adjusted for inflation) has fallen two months in a row, after a big boost in the first quarter that mostly went to the ultra-rich who received mammoth bonuses and stock options. For the rest of us, the picture is a well-known story around kitchen tables: The median hourly wage, adjusted for inflation, has fallen four months in a row through May and was up just 1.1% in the past year.
The personal savings rate was negative for the 26th consecutive month in May.
From a distance, everything looks fine. The U.S. economy likely grew at a 3% annual rate in the just concluded second quarter, after stumbling to a 0.7% growth rate in the first quarter.
But the improvement isn’t as good as it looks, because much of it is merely a turn in the inventory cycle that has little to do with the strength of final demand. Many companies had reduced their bloated inventories too much, and they began to replenish their stocks in the second quarter in anticipation of a pickup in sales.
The Institute for Supply Management index showed more manufacturing firms increased production than at any time in the past three years, and the net percentage reporting more orders was the most in a year.
But if there is no pickup in sales to U.S. consumers, these companies will find themselves overstocked again unless exports can make up the difference.
That’s why the best news this week was the drop in the value of the dollar, which hit a 26-year high against British sterling.
Not all is doom, of course. There’s been a steady drop in gasoline prices over the past six weeks, which should give consumers as much of a psychological lift as a fiscal one.
And on Friday, the government will report on job growth in June. All the indications point to another healthy increase of about 130,000 in nonfarm payrolls, while the jobless rate is expected to remain at a very low 4.5%.
As long as consumers are working, they’ll keep spending.