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By New Deal Democrat

Like the character in the "Bring out your dead!" Monty Python skit, the American consumer keeps protesting that s/he isn't dead yet.

So why, given wages that are several percent below their 2010 peak, do consumers keep spending?

Let's go back to the paradigm for the American consumer that I first set forth 6 years ago. In order to increase spending, the American consumer must either:

  • have a wage increase
  • be able to refinance debt at lower rates, thus freeing up cash
  • be able to cash in an appreciating asset

Let's look at each in turn. First of all, while inflation adjusted wages have been overall flat for the last 5 years, there has been a tick up of several percent since the late 2012 bottom:

(click to enlarge)

On the other hand, as shown in this graph from Mortgage News Daily, the increase in interest rates has well and truly killed refinancing:

(click to enlarge)

Finally, here is a graph of Americans' total net household worth, via Doug Short:

(click to enlarge)

Why has household net worth almost completely rebounded? Mainly because of increasing house values, as shown in this graph of the Case Shiller index:

(click to enlarge)

Secondly, more affluent households who rode out the downturn in the markets during the Great Recession are seeing their 401k balances completely recover along with stock prices, as shown in this graph of the S&P 500:

(click to enlarge)

We know that there is a wealth effect, and for now the wealth effect is picking up where debt refinancing left off.

As an aside, here is the graph of those "Not in the Labor Force, Want a Job Now" I ran on Friday:

(click to enlarge)

Notice the spike downward in the last 6 months. I do not think it is coincidental that it mirrors the graph of household worth above. The Atlanta Fed has reported that in the last couple of years the percentage of those leaving the workforce due to retirements has increased, and I suspect that the recent spike in net worth has caused a stampede of Boomers for the exits.

Source: The State Of The Consumer: 'I'm Not Dead Yet!'