Consumers are Coming Back

Popular Economics Weekly

The consumer is back, with spending on track to approach pre-recession levels by the end of this year.  Why?  Employment is now in a virtuous cycle.  Enough new jobs were created over the past 3 months (200,000+ per month) to trigger greater aggregate demand for goods and services, and consumers are paying down their debts.  One caveat is that if Republicans succeed in further cutting government spending without raising taxes (or allowing the Bush tax breaks to expire), it will mean less revenue to pay down public debt.

The Federal Reserve Bank of New York released the Quarterly Household Debt and Credit Report for the first quarter of 2011 today, which showed signs of healing in the consumer credit markets. Evidence of improvement includes:

• an increase in credit limits, by about $30 billion or 1 percent, for the first time since the third quarter of 2008;
• a steady number of open mortgage accounts, following a period of decline beginning in early 2008;
• continued decline of new foreclosures and new bankruptcies, down 17.7 percent and 13.3 percent respectively in the last quarter;
• a 15 percent decline of total delinquent balances, compared to a year ago; and
• a broad flattening of overall consumer debt balances outstanding.

Non-housing related debt, including credit cards, student loans, and auto loans, declined slightly (less than 1 percent), driven by a noticeable 4.6 percent decline in credit card balances. Credit inquiries, an indicator of consumer demand for new credit, came off their recent peak in the fourth quarter of 2010.

“We are beginning to see signs of credit markets healing gradually and evidence of greater willingness of consumers to borrow and banks to lend,” said Andrew Haughwout, vice president and New York Fed research economist.

Mortgage delinquency rates in particular are the best gauge of a RE recovery, and delinquency rates have declined to 8 percent of total mortgages outstanding, while foreclosures have been holding at 4 percent of mortgages, for some reason.  So we may also see employed buyers returning to home buying.  More cash is becoming available to them, is the bottom line.

Overall retail sales are in recovery, with consumers buying across the spectrum.    The widespread strength in retail sales is encouraging, reflecting greater willingness on the part of consumers to spend.  Some interesting patterns are showing up. 

Gains in furniture & home furnishings; building materials; and electronics & appliance stores suggest that while home sales are anemic, homeowners are starting to spend money on improving the quality of the homes.  Also, increases in very discretionary spending such as food services & drinking places are favorable.  But rising costs for gasoline and food may be cutting into discretionary income and could dampen spending unless offset by continued employment gains.

The bottom line is that consumers now have less debt and so more money to spend.  And businesses have to hire if they want to continue to grow, so look for continued job growth to feed the virtuous cycle.

Harlan Green © 2011