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Summary

  • Over 2/3rds of the economy is driven by the consumer.
  • Consumption growth is currently weak.
  • Is the problem debt, low income, or ???

Last week my post concentrated on prime interest rates' relationship with the economy - and showed there was a general lack correlation between economic growth and the prime interest rates. With over 2/3rds of the USA economy driven by the consumer - it seems to me the real question is what is wrong with the consumer?

The graph below showing the ratio of Personal Consumption expenditures to GDP - shows that the consumer has been a growing driver of the economy - however, the growth rate appears to be stagnant since the end of the Great Recession.

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So it should follow if economic growth is slow, then it is not the government or business that is slacking - but the consumer. Testing the level of debt in various periods, the below graph looks at the total debt load as a ratio to Disposable Personal Income. Note that home mortgages are NOT included in this data set.

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It appears consumer credit as a percentage of income is at an all-time high. Below is the same data set removing student loans.

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It appears that after removing student loans (blue line), the current consumer debt levels may not be excessive. However, student loans are likely reducing consumption for this younger age group as they pay off the student loans with their starting salaries.

But consider that consumer loans outstanding are growing at a rate over ten times the rate of GDP growth. It is likely that at this large of differential of rates of growth, the USA has passed or will pass the debt tipping point (where private debt slows economic growth).

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Consider:

  • When a consumer borrows money to buy a product, it adds to GDP today - but will reduce the consumption in the future as the consumer repays the loan. The year-over-year growth of consumer credit would account for approximately 1% of GDP growth.

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  • The percent of consumer disposable income used to repay consumer loans (not including mortgages) is historically low because of the moderation in interest rates. My takeaway is that consumer debt is not overpowering the consumer in general.

I cannot correlate consumer debt levels or flow to economic activity (expressed as GDP) unless I cherry pick time frames or data series. Still the growth of the USA economy is not outstanding - and consumption is the reason. Here are my final thoughts in graphs:

  • Since the mid-1980s, the consumption rate of growth has been faster than the general rate of growth of GDP.

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  • Currently the rate of growth of consumption is almost 2% lower than the periods proceeding the Great Recession

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  • Disposable income and consumption expenditures go hand in hand. It is no stretch of imagination to understand that income growth is lagging at the rate of 2% per year. The overwhelming reason is that the population not working is 4% larger compared to the period before the Great Recession. Even job growth at minimum wage would help the economy grow.

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  • Listening to the press, there is a perception of huge growth in safety nets (government benefits to the lazy sods, disabled, and the old timers) - currently the growth rate of transfer payments is on the low side historically.

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Job growth is a lagging economic indicator. However, it is also true that lack of jobs constrains economic growth - a situation we are facing today.

My usual weekly economic wrap is in my instablog.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Source: Consumers Are Failing The Economy