Increased Consumer Spending a Good Sign

Financial FAQs

The most recent retail sales show consumers are able to spend more, even as they borrow more. Add to that credit card delinquencies are at an 18-year low, according to credit reporting company Transunion Corp., and we have a picture of an improving economy. This is, the fact that consumers can continue to cure their debt problems, while spending more, is a good sign.

"The national credit card delinquency rate continues to remain at the lowest levels we've observed in 18 years," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. "It's a positive situation because average borrower balances have increased over the past year as new card originations have grown."

Graph: Econoday

Retail sales soared in July. Total sales rose 0.8 percent for the strongest rise since February with ex-auto sales also up 0.8 percent for, again, the best showing since February. All components show gains including motor vehicles, general merchandise, health & personal care, furniture, and restaurants. Clothing also shows a significant gain, one that points to strength for the back-to-school season. Ex-auto ex-gas the gain is 0.9 percent for the best showing since January, said Econoday.

This was predicted by the surge in consumer borrowing. Total credit outstanding rose $6.5 billion in June, following a $16.7 billion jump the month before, reported the Federal Reserve. The latest gain was led by non-revolving credit, gaining $10.2 billion in June after a $9.2 billion rise in May. Non-revolving credit is mostly for motor vehicle purchases and student loans.

 

Graph: Econoday

What is behind greater consumer spending is the consumer feels better about the economy despite the recent run up in gasoline prices. Apparently it is due to a somewhat improved jobs picture with 163,000 net payroll jobs created in July. Strength was in the consumer's assessment of current conditions which was up solidly at 87.6 versus July's 82.7. This gain also underscores the improvement seen in weekly jobless claims, which are now down in the 350,000 range from more than 400,000 last year.

Graph: Econoday

So there are signs that the recovery may be gaining a little more strength—emphasis on little, however.  The Conference Board’s July index of leading economic indicators rebounded 0.4 percent, offsetting the June decline of 0.4 percent. It is at its highest level since February 2007, which should boost consumer confidence even higher.

Graph: Econoday

The improvement in jobless claims, which points to improvement in underlying job growth, together with improvement in building permits led the increase in the overall index with each component having a contribution of 0.18 percentage points.

Also with positive contributions were the report's credit reading, the stock market, and the report's imputed readings for new orders on both consumer and capital goods which are government data that have yet to be released, said Econoday.

So July was a good month for consumers, and points to further economic improvement for holiday retail sales, which should drive economic growth for the rest of the year. So consumers seem to be focusing more on improving their own financial condition, rather than the discouraging news about China, Europe, and a deadlocked Congress.

Harlan Green © 2012