MNI ANALYSIS: US Consumers Risk More As Confidence Rises

By Holly Stokes and Sara Haire

     WASHINGTON (MNI) - Amidst a 17-year low unemployment rate and soaring stock

market, the Consumer Confidence Index points to continued optimism for future

economic growth - posting an 18-year high in February and staying at an elevated

level in March. However, much of this confidence seems to ignore the rising cost

of living, and echoes trends seen in the housing bubble and pre-recession

spending, as consumers' exuberance fuels credit card purchases and a lack of

savings.

     Despite declining purchasing power, as highlighted in an MNI analysis

published March 23, consumers remain optimistic - largely due to rising

equities. There has been a general correlation of the S&P 500 monthly average

and consumer confidence, as consumers appear to be conflating the stock market

gains with solid economic growth.

--CONFIDENCE CHANGING SPENDING HABITS

     As real wages begin to decline, consumers appear to be financing

expenditures via credit. The revolving portion of consumer credit, which

captures credit card spending, has broken records recently. This rise in

borrowing, high by itself, is more worrisome when coupled with recent movements

in the personal savings rate.

     In a clear case of the wealth effect, the personal savings rate dropped to

2007 levels at the end of 2017, and is still very low, as consumers look at

rising equities and are enticed to invest rather than save.

     The rising confidence in the economy is propelling more consumers to spend

money they don't have and not to save the money they do have. The combination of

falling savings and rising credit is particularly risky for the stability of

future economic growth. The savings rate and revolving credit disparity is

reaching pre-recession levels, perhaps foreshadowing a similar crisis of

borrowing outpacing the ability to make future payments.

--SAVINGS LOW BUT NET WORTH HIGH

     While the savings rate is declining and revolving credit is rising,

household net worth as a percentage of disposable income as reported by the Fed

reached 679% in the 4Q, surpassing pre-recession levels. Two potential

influencers in lifting household net worth that are not accounted for in the

savings rate are stocks and home values.

     Both stock values and home prices have been on the rise. Gains in both of

these assets do increase household net worth, however, they can both be volatile

and increases in them do not signal stable, long term wealth.

     As observed by MNI, as home prices continue to rise, household net worth is

rising in tandem, however they seem to be getting continuously closer. The last

time they were moving so closely was right before the recession.

     Consumers have taken advantage of the low fixed rate mortgages in the

recovery period. Now, as home values continue to rise and consumers are

continuing to make low interest payments, household net worth has risen as

liabilities shrink. However, as the Fed continues to gradually ease into raising

interest rates, household net worth should temper as newly issued mortgages

rise.

--CONSUMERS' FUTURE RISKS

     Reliance on volatile stocks and rising home values relative to mortgages

pose a real risk to stable GDP growth, especially if people are counting on the

current strength of these assets to finance future expenses. There is a great

risk to consumers future spending and confidence as net worth appears to be due

to a reliance on home value increases and gains in the stock market and less

from a build up of actual savings.

     Further, while confidence and equities remain high, February's small

decline in CCI was driven by emerging doubts in business performance and

declining expectations for stock market rises in the next 12-months, as tariffs

and trade wars shift investment prospects. If confidence continues to mirror

growing concerns in the stock market, then there could be a marked transition

into slowing investments and spending as equities move into corrective

territory.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

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