The Consumer Recovery Will Take Time

It appears that it will take some time for consumption to rebound in the U.S., which could lengthen the recovery of this latest recession.

In order for consumption to rebound, we need some stabilization in the declining consumer revolving credit, combined with increase in consumer confidence. However, both continue to decline. We note that the increase in consumer confidence since April '09 is likely due to what we believe to be a non-warranted 33% increase in the equity market since the March lows.

What we are looking for is a combination of deleveraging, higher savings rates followed by stabilization in unemployment, all of which represent a slow recovery.

Although we are seeing some deleveraging in consumer balance sheets, as the revolving credit continues to decline (Figure 1), we have not yet seen a correction in revolving credit as a percentage of disposable income (Figure 2). We believe this is mainly due to continuing rise in unemployment (Figure 3), which we do not view as a lagging indicator in this recession. We also believe that more and more of the currently employed consumers are becoming cautious as they may be next. This also explains the continuing increase in savings rate.

Figure 1

Figure 2

Figure 3

Higher credit card default rates, decline in home equity loans (as the housing market has yet to hit a bottom) also provide support for our view that consumption recovery will not begin in Q3, nor in Q4.

We would like to see savings rate climb to 8% (from 6.9% in May), the level at which it stabilized in the late 80s. In addition, although it may sound extreme, we would also like to see revolving credit as a percentage of disposable income to decline to 4% - 6% (from 8.5%), where it was in the late 80s. During the mid-to-late 80s, we believe consumers were 'wowed' more by credit cards.

Unfortunately, over time, the increased awareness of credit cards changed American consumer behavior and started the enormous leveraging for which we are now paying. Of course, although we are hoping for consumers to once again become realists, the federal government's policies and unfounded optimism may lengthen the fantasy-to-reality transition.

Lastly, the Fed will provide an update on change in consumer credit on Wednesday at 3pm (ET). The current consensus stands at -$7.5 billion, which we hope will be met. We note that although this data is somewhat lagging, again, the trends we see will provide us a clearer picture of a maybe-recovery.

Disclosures: None

Comments

[Larry House:]

I think consumers are in the process of making a fundamental change in their attitudes toward credit and their use of it. I think consumer credit levels will decline for years to come. Either consumers will not be 70% of the future economy, or they will be 70% of a smaller economy.

Jul 06 10:57 AM

[The Aft Deck:]

Hopefully they will choose a more balanced credit approach

Jul 06 12:10 PM

[Alex_G:]

The savings rate for the most prolific spenders (baby boomers) is going through the roof as they need to replace the savings they have lost in the asset meltdown. No home equity and lower credit card limits will also take it's toll. Anyone who thinks the consumer will take us out of this is just dreaming.

Look for the consumer to be 60-63% of a lower GDP going forward, which will also hurt emerging markets that make a living exporting to the US and EU.

Jul 06 12:34 PM

[Larrysyr:]

Times like this represent a restructuring of the economy, which the commenters allude to. If so, then the old measures - especially consumer spending - will not reflect the health of the restructured economy. Also, it would be foolish to expect a replication of the recent past as we go forward.

Baby boomers (of which I am one) should have learned the hard lesson of living within their means. Less consumer spending may sound bad for the economy, but it's probably a good development for American society.

Jul 06 12:44 PM

[Ali Mogharabi:]

Larrysyr - I agree with you. Actually we mentioned this a while back in our article on the necessity for higher savings (seekingalpha.com/artic...).

Consumption will likely not maintain its 70%+ grip on the GDP, and hopefully manufacturing will come back (China transitioning towards higher consumption, American brands remain widely followed and loved, dollar is getting cheaper, US companies bringing manufacturing back to the US and labor and other costs will become more comparable with those in the emerging economies, etc and etc).

However, that transition will take a while. And don't forget the fact that some policies, incl the so-called stimulus package, are doing nothing but slowing down this transition.

Lastly, I must say that those that slashed their debt levels in the 70s,, appeared that they learned nothing given that they embraced those credit cards so openly in the 80s. So this 'lesson learning' hope hasn't proven to work out in the past.


On Jul 06 12:44 PM Larrysyr wrote:

> Times like this represent a restructuring of the economy, which the
> commenters allude to. If so, then the old measures - especially consumer
> spending - will not reflect the health of the restructured economy.
> Also, it would be foolish to expect a replication of the recent past
> as we go forward.
>
> Baby boomers (of which I am one) should have learned the hard lesson
> of living within their means. Less consumer spending may sound bad
> for the economy, but it's probably a good development for American
> society.

Jul 06 02:15 PM

[Moon Kil Woong:]

Even if consumers are confident that still doesn't mean they should increase spending or spend all or even more than 100% of their income as in the past. I certainly hope consumer behavior has changed for good. It is sad to think only a prolonged recession can instill the values we have all been taught to us as a child.

Government encouragement to do the wrong thing is no help in this matter. Wilful austerity is much better than inevitable forced austerity which is where a out of control federal deficit leads.

Jul 06 10:06 PM

[prairiedog555:]

Congress/Obama needs to reverse the decision to allow credit card companies to charge Tony Soprano rates, and get back to states setting usury rates.
This was a decision to allow cc companies that were headquartered in S. Dakota to charge rates allowed in that state.
I do not think Pres. Obama is a good fiscal administrator, but I had hoped that he would as least get after the cc companies like he said he would.
Although Barney and Chris dodd would have to change their lifestyles if he did.

Jul 07 07:41 AM

[Ted Hurlbut:]

As we lay in the bottom, it does represent the "new normal", reflecting the consumers new regard for savings, and an unemployment rate which remains very troublesome. that does not mean that consumer spending won't grow from here, it will, just at a much lower rate than we've seen in prior recessions. This isn't going to be a "bounce-back' recession, it's a "resetting" recession, and growth will resume at a moderate pace from the new baseline.

Jul 07 07:11 PM