Popular Economics Weekly
Household debt continues to decline, which will free more disposable income for consumers, which should be a sign that consumer spending, the main driver of economic growth, will continue to grow. That has to be why Q2 GDP growth jumped to 4 percent from Q1’s -2.1 percent shrinkage, with its weather problems. But consumers have become more choosey, so it may not yet be reflected in such as retail sales, which have been flat the past 2 months.
That is why Janet Yellen’s Fed is keeping interest rates low. The Fed still has some doubt that more growth and fuller employment is certain this year. Final GDP sales of domestic product rebounded 2.3 percent after dipping 1.0 percent in the first quarter. Final sales to domestic purchasers (excluding export sales) gained 2.8 percent in the second quarter, compared to 0.7 percent in the first quarter.
Turning to components, inventory investment jumped $93.4 billion after rising $35.2 billion in the first quarter. Importantly, personal spending (PCE) posted a robust 6.2 percent gain, following a 1.0 percent rise in the prior quarter. This is the result of higher disposable incomes. Consumer durables’ PCEs were particularly strong with nondurables healthy.
Aggregate household debt showed a minor decrease of $18 billion in the 2nd quarter of 2014, said the New York Fed in its Q2 Household Debt and Credit Report. As of June 30, 2014, total consumer indebtedness was $11.63 trillion, down by 0.2 percent from its level in the first quarter of 2014. Most of it was in mortgages, with both first and second equity line mortgages declining. Overall consumer debt still remains 8.2 percent below its 2008Q3 peak of $12.68 trillion.
Graph: Calculated Risk
This Calculated Risk graph from 2003 shows mortgages, the largest component of household debt (gold columns), decreased by 0.8 percent. Mortgage balances shown on consumer credit reports stand at $8.10 trillion, down by $69 billion from their level in the first quarter.
And delinquency rates improved across the board in 2014Q2. As of June 30, 6.2 percent of outstanding debt was in some stage of delinquency, compared with 6.6 percent in 2014Q1. About $724 billion of debt is delinquent, with $521 billion seriously delinquent (at least 90 days late or “severely derogatory”).
So the decline in household debt will most likely improve both new and existing home sales. In fact, the Q2 GDP report shows a higher percentage of growth in both residential and non-residential (i.e., commercial) construction, though they are still at recession-lows. Investment in single family structures (blue line in graph) was $188 billion (SAAR) (almost 1.1 percent of GDP). Investment in home improvement (red line) was at a $179 billion Seasonally Adjusted Annual Rate (SAAR) in Q2 (just over 1.0 percent of GDP).
Consumer debt is still too high, however, which accounts for the fluctuations in consumer spending—up one month and down the next. We have to hope employment continues to improve this year for economic growth to continue. It will boost wages and salaries, as well, which are finally showing signs of life.
For instance, the Fed's latest Beige Book found that wage pressures were modest in most districts, though they were rising in sectors such as construction and energy, where employers were struggling to find qualified workers. It said increases in the minimum wage in some parts of the country were also pressuring wages.
While average hourly earnings gains are up just 2 percent over the last year, aggregate wages for production and non-supervisory workers, which include overtime, are up 4.6 percent, a good sign.
Some Wall Street and other conservative economists are calling for higher interest rates at the first sign that household incomes are rising. As the New York Fed’s Q1 Household Debt and Credit Report shows, that mustn’t happen until consumers are healthier—which means their incomes rise sufficiently to continue to pay down the huge amount of debt accumulated during the housing bubble.
And Janet Yellen, the macro economist who understands the bigger picture, is resisting those calls for a premature rise in rates. "While rising compensation or wage growth is one sign that the labor market is healing, we are not even at the point where wages are rising at a pace that they could give rise to inflation," she said recently.
Harlan Green © 2014
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