The Financial Health of U.S. Consumers Is Tepid at Best

lance_HSThe U.S. economy has added millions of jobs since the financial crisis of 2008. The Fed has added trillions of dollars to their balance sheet and kept rates at or near zero for nearly eight years.

What do we have to show for it?

On the one hand, we are at or near full employment according to most economists, with our unemployment rate at about 5%. On the other, efforts to stimulate consumer spending, bank lending, and inflation have been mildly successful at best.

Good intentions aside, the dark side to the Fed’s policy was to keep rates so low for so long that it launched a war on savers. Keeping money in a bank account is actually losing money with inflation. Long-term bonds, adjusted for inflation, are actually paying a near-zero rate of return.

Many of those savers are retirees that count on fixed income from safe investments like high-quality bonds or bank savings accounts. So, those needing safe income either have to spend the principal on retirement savings, or try to get it from riskier investments.

The Fed doesn’t care. They’d rather run an untested experiment to revive the economy that sacrifices savers. There are corners of the market that still offer nice income through remarkable dividends, and Rodney and Charles are about to launch a new service called Peak Income around this idea. But there’s no doubt that the Fed stiffed savers in an effort to improve spending.

Well, these next two charts suggest their efforts weren’t too successful.

Since the Fed is more concerned with spenders than savers, let’s look at year-over-year retail sales in the chart below:

Retail Sales Keep Sliding

The chart spans the last 23 years, and you can see what sales were doing over the last two recessions. Most interesting to me is how sales have been falling since 2012, even with the Fed’s quantitative easing through 2014 and near-zero interest rates throughout. Today, they’re at pre-recession levels.

So why are retail sales that important? Retail sales account for half of consumer spending, and consumer spending accounts for about 70% of our economy.

The Fed’s monetary policy also prevented debt deleveraging. Overall, consumer debt didn’t really fall after the financial crisis. Credit card debt did shrink a bit, but look at the chart below:

Consumer Credit

Along with credit card debt, auto loans shrank a bit after the crisis but rebounded quickly. Student loans just seem to be out of control! I guess the lack of good jobs are keeping students in school longer. Tuitions are going up, and student loans are exploding.

So overall, consumer debt has actually grown since the financial crisis seven years ago. When consumers are burdened with debt payments, they have less to spend on other things.

Then there’s inflation.

Energy prices have put a damper on inflation over the last couple years, and the Fed is concerned that falling prices or deflation could really damage the economy. Their preferred measure of inflation is the PCE Price Index where they have a 2% target for inflation, and to date have managed annual price gains of 1.7%.

I’m skeptical as to how the Fed looks at inflation. Food and home prices are going up, rent costs are skyrocketing, college tuition is going through the roof and health care costs are moving sharply higher!

Okay, so gas prices are lower… but if consumers are burdened by debt, and if food, shelter and other services are markedly higher, and if wages have been stuck in the mud for years, you kind of start to understand where we are.

The actual number of fulltime jobs created since the recession has been impressive. What hasn’t been so impressive is the quality of those jobs. This stumps the Fed. While the unemployment rate is around 5% and as close to full employment as ever, wages have been stagnant.

That’s a big problem. If wages aren’t growing and consumer debt is growing, it stands to reason that consumers have less to spend.

Nevermind how the Fed calculates inflation. If consumer spending accounts for roughly 70% of the U.S. economy and consumers aren’t spending, that’s going to hurt!

And looking at estimates of first-quarter corporate profits for this year, it already is. Earnings are expected to be down 9% in the first quarter. Stock buybacks and other accounting gimmicks are losing their luster.

So will the Fed be hiking rates anytime soon? I wouldn’t count on it.

Lance Gaitan

Editor, Treasury Profits Accelerator

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Categories: Purchasing Power

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.