Free Trial

REPEAT: MNI ANALYSIS: US Consumers Risk On Rising Confidence

Repeats Story Initially Transmitted at 13:45 GMT Mar 28/09:45 EST Mar 28
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

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
}); window.REBELMOUSE_ACTIVE_TASKS_QUEUE.push(function(){ window.dataLayer.push({ 'event' : 'logedout', 'loggedOut' : 'loggedOut' }); });