Four years after the end of the Great Recession, the consumer is back – just not with a vengeance.
Consumption continues to show improvement, and yet Americans still clutch their wallets.
“We’re sort of at a glass half full,” said Ken Goldstein, an economist with the New York-based Conference Board, which measures consumer confidence.
On the plus side, rising home prices, improving jobs numbers and a falling unemployment rate are bolstering how consumers feel about the economy.
“All of that has sort of reaffirmed consumer expectations that this thing would finally turn around,” Goldstein said.
In its latest monthly reading, the Conference Board reported Tuesday that its confidence index hit levels last seen in January 2008, shortly before the financial crisis started.
“This is a good report. Consumer confidence has gained significant traction and is likely to help retailers in the coming months as the back-to-school shopping season starts heating up,” Chris Christopher, an economist with forecaster IHS Global Insight, said in a note to investors.
Sentiment and behavior, however, are different matters.
The Bureau of Economic Analysis, in its final revision of growth figures for the first three months of this year, said Wednesday that consumption had risen by 2.6 percent, not 3.4 percent as earlier thought. Since consumption drives roughly two-thirds of U.S. economic activity, the bureau shaved its growth estimate for the first quarter from 2.4 percent to a more lukewarm 1.8 percent.
Consumers are spending more but not with gusto, according to the National Retail Federation. In its latest monthly economic outlook, the group said that through May, retail sales – excluding autos and restaurant meals – had risen by 4.8 percent over a 12-month period.
“Despite the sting of higher (payroll) taxes and government spending cuts, consumers are spending. April’s improvement does not alter our view that current spending behavior remains constrained and cautious,” Jack Kleinhenz, the group’s chief economist, wrote in his June report. “We do expect, however, spending through the second half of 2013 will pick up, offsetting the modest levels seen during the spring.”
Auto sales remain the brightest spot. Car sales in May were up 5.7 percent over the same month last year, while light trucks and SUVs were respectively up 10.9 percent and 14.3 percent over May 2012.
“There have been improvements in the standards for the auto loans, and there has been sort of a loosening, and you can see that in sales,” said Daniil Manaenkov, an economic researcher at the University of Michigan, which publishes a quarterly model of the U.S. economy.
Easier bank loans have helped car sales, but the surge in sales of pickups is thought also to be tied to the rebound in the housing sector, which brings more opportunity for tradesmen, Manaenkov said.
Pent-up demand is helping, too. Amid the economic crisis in 2009, vehicle sales plunged to 10.4 million. The average age of U.S. vehicles rose above 11 years in 2011 and 2012. But the R.L. Polk automotive research group now forecasts 15.3 million new vehicle registrations this year, up 6.6 percent over last year.
“When are we going to see folks do that with that old sofa, refrigerator, washing machine and so on? That hasn’t happened yet,” said Goldstein, who thinks flat wage growth is partly to blame. “If we start to see a pickup there, and we continue to see job growth, then the financial shoe would hit the floor.”
Rising home prices are making people feel richer, boosting both consumer sentiment and spending. New home sales, as measured by the National Association of Home Builders, beat analysts’ forecasts Tuesday by rising 2.1 percent in May, and the midpoint price in May for a new home was 10.3 percent higher than it was a year earlier.
Sale prices for existing homes, as measured by the S&P/Case-Shiller U.S. National Home Price Index, also are improving. This index shows that its measure of prices in 10 big cities and 20 big markets has risen by 11.6 percent and 12.1 percent, respectively, since April 2012. Sale prices for existing homes, when adjusted for seasonal factors, were up in all 20 major markets measured for the fifth straight month.
Inflation also is helping. It averaged 1.4 percent for the 12 months that ended May 30. That’s low by historical standards, and it helps ease some of the sting of anemic wage growth. It means rising prices aren’t eroding consumer spending power by much.
Wage growth, as measured by the Labor Department’s quarterly Employment Cost Index, increased by 1.7 percent over the 12 months that ended March 31. That’s slower than the 1.9 percent increase from March 2011 to March 2012.
Low inflation keeps the cost of borrowing down for consumers, with mortgages and car loans cheaper than they've been for most of recent decades.
“That means less upward pressure on interest rates, especially on things like bank credit cards, which are variable” rate, said David M. Blitzer, the managing director of the S&P Dow Jones Indices. “Low inflation has definitely been a plus.”
His company tracks default rates on loans, another good barometer for the state of the consumer, and it publishes monthly indices on mortgages, bank cards and loans. The default rate on first mortgages in May was 1.31 percent, a low since the end of the recession. Auto loan default rates in May were 1.04 percent and credit card default rates were 3.63 percent during the month, both healthy numbers.
But consumers are still reducing their debt loads, banks still have tighter lending standards for mortgages and consumers aren’t racing to take on a lot of new debt.
“The fact that people would remain cautious is not surprising,” Blitzer said.
The Federal Reserve tracks the ratio of a household’s debt payments to disposable personal income, and for the first three months of this year it stood at 10.49 percent. In 2003, amid a stretch of boom years, the rate was 13.13 percent.
“People don’t have to write checks as big every month to stay current” on their bills, Goldstein said, confident that the consumer is nearing a return to freer spending.
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