Consumer Spending: Bulls vs. Bears

| About: VanEck Vectors (RTH)

One more point on which bulls are currently clashing with bears. First the bulls, represented by NBF Financial’s Stéfane Marion:

Some pundits are making a very big deal about the record decline in consumer credit in November (-$17.5 billion). We fail to see why we should be alarmed by such a development, not when consumption is growing at a $4 billion monthly pace. What’s happening is that consumers are deleveraging while growing consumption in line with disposable income.

With the savings rate remaining stable at 4.7%, it is worth keeping in mind that households are generating roughly $43 billion a month in savings. That is more than enough to reduce their indebtedness and still have some money left over for investment. As today’s Hot Chart shows, consumption is up 2.3% from its year ago level while credit is down 3.9%. At this juncture, the deleveraging cycle is more virtuous than vicious.

One of the “pundits making a very big deal” about that is Gluskin Sheff’s David Rosenberg:

(…) the record $17.5 billion plunge (data back to 1943) in consumer credit attests to the extent of the speculation there is and the premise that we have a glaring gap between investor perception and economic reality. The consumer credit collapse in November represented the tenth falloff in a row (this is an unprecedented string)(…)

It is not unusual for consumer credit to decelerate while spending is accelerating. What is special this time around is that credit is declining YoY and the monthly decline is showing no sign of abating.

NBF is right when it says that:

....consumers are deleveraging while growing consumption in line with disposable income.

But what is surprising is that this is, in spite of the fact that PDI is rising, only because of transfer payments and lower taxes. Americans are spending about 50% of the “recession income” and saving the other 50%.

As I observed on December 28: “Wages and Salaries dropped $216 billion in 15 months, or 3.3%, but higher transfer receipts and lower income taxes totaling $720 billion enabled Personal Disposable Income to rise by $326 billion, or 3.0%, during the most severe economic contraction since the Depression.

Americans maintained their expenditures and saved the remaining $340 billion. Is this the “new normal,” the era of frugality expected by many observers? These numbers suggest not. Americans are not ready nor willing to reduce their standard of living, as long as Congress obliges.”

Disclosure: no position