Consumer Debt Surges In November
Last week, I addressed the issue with consumer spending and the issue of consumer debt. To wit:
"Given the lack of income growth and rising costs of living, it is unlikely that Americans are actually saving more. The reality is consumers are likely saving less and may even be pushing a negative savings rate.
I know suggesting such a thing is ridiculous. However, the BEA calculates the saving rate as the difference between incomes and outlays as measured by their own assumptions for interest rates on debt, inflationary pressures on a presumed basket of goods and services and taxes. What it does not measure is what individuals are actually putting into a bank saving or investment account. In other words, the savings rate is an estimate of what is 'likely' to be saved each month.
However, as we can surmise, the reality for the majority of American's is quite the opposite as the daily costs of maintaining the current standard of living absorbs any excess cash flow. This is why I repeatedly wrote early on that falling oil prices would not boost consumption and it didn't."
As shown in the chart below, consumer credit has surged in recent months and exploded in November rising $24.5 billion in the month alone. More importantly, while consumer credit continued to# expand, PCE and Wages remain primarily stagnant.
"Here is another problem. While economists, media, and analysts wish to blame those 'stingy consumers' for not buying more stuff, the reality is the majority of American consumers have likely reached the limits of their ability to consume. This decline in economic growth over the past 30 years has kept the average American struggling to maintain their standard of living."
As more evidence of consumer's struggling to maintain their standard of living, while consumer credit has continued to climb, retail sales remain weak as shown below. And as the astute Greg S. pointed out yesterday:
Rising credit and delinquency rates combined with stagnant wage growth and you have a wicked brew being mixed for the economy. Furthermore, once you strip out surging healthcare-related costs, the strength witnessed in economic and inflation-related reports as of late seem much less optimistic. (This is an issue I have repeatedly warned of over the past several years.) Despite surges in optimism, with roughly 70% of the economy dependent upon the consumer, the ability of consumers to continue leveraging consumption is limited. As wage growth continues to stagnate, except for the top 20% of those employed, economic growth will likely remain sluggish, which suggests the recent surges in optimism, as I will discuss in a minute, will likely fade as "Trump-uberence" reconnects with "economic realities."
NFIB Optimism Explodes
Besides the surge in consumer debt, optimism has also exploded since the presidential election. In the latest NFIB Small Business Survey, respondents' confidence surged to levels only seen twice before in history. Interestingly, this surge comes near the end of a long economic cycle versus a more expected post-recessionary rise seen previously. (In many cases, as noted by the vertical dashed lines, sharp spikes in confidence have coincided with short to intermediate-term market peaks.) However, while the spike in confidence is certainly encouraging, there are a couple of aspects about the survey that should be considered.
- Small business owners TEND to be more conservatively biased politically speaking. Therefore, it is not surprising the "Trump win" has lifted their spirits.
- Given that regulations, taxes and the Affordable Care Act have weighed heavily on small business owners, the "hope" for any relief is certainly reason for a rise in expectations.
- The survey sample was the smallest of the entire year consisting of just a little more than 600 respondents.
Furthermore, if we use a 12-month average of the survey to smooth out the volatility, a very different picture emerges and one that is likely far more consistent with the current state of the economy. Importantly, "expectations" have tended to run well ahead of reality. As shown below while spikes in expectations have corresponded to short-term rises in economic activity, such increases have generally been very short-lived. This time around a much stronger dollar, rising interest rates, and plenty of potential policy missteps could quickly reverse "exuberance" back to "reality." Increases in confidence are one thing, but actually committing capital to projects, expenditures, equipment and further employment are based on actual increases in demand, not hope. For evidence of demand, we can look at sales "expectations" versus actual "sales." Not surprisingly, since the election, "expectations" of increased sales have surged. However, "actual sales" have been on the decline for several months due to the constriction of consumer demand due to increased debt and weak wage growth as noted above. This also shows up in actual real, inflation-adjusted, retail sales data, which shows little momentum. While the surge in "optimism" is certainly welcome, there is a function of an economic cycle that must be dealt with. As I discussed previously:
"It is not just tighter monetary policy weighing on fiscal policy changes but the economic challenges as well. As my partner Michael Lebowitz recently pointed out - 'this ain't the 1980s.'
'Many investors are suddenly comparing Trump's economic policy proposals to those of Ronald Reagan. For those that deem that bullish, we remind you that the economic environment and potential growth of 1982 was vastly different than it is today.'
This also isn't 2009 where economic activity and consumption is extremely depressed which gives tax cuts, incentives and regulatory reforms have a much bigger impact on economic and earnings growth.
Will "Trumponomics" change the course of the U.S. economy? I certainly hope so.
However, as investors, we must understand the difference between a "narrative-driven" advance and one driven by strengthening fundamentals. The first is short term and leads to bad outcomes. The other isn't, and doesn't."
So Does Policy Uncertainty
While optimism and confidence have certainly surged over the last couple of months, something else has as well - policy uncertainty. As I stated above, the surge in optimism from consumers, investors, and business owners has certainly lifted spirits, it hasn't translated into fuel for economic growth as of yet. Interestingly, as Nick Timiraos from the WSJ notes, with free-trade adversaries on one side of his economic team and market-oriented advisers from the Washington and Wall Street establishments on the other, Donald Trump has charted an unpredictable course.
"A flat organizational structure could set these and other individuals against each other as they compete for Mr. Trump's support. Uncertainty about his economic agenda is heightened by how Mr. Trump, who has never held public office, has changed his mind on some policy issues while saying little about others.
Tensions are already surfacing now that Mr. Trump must translate campaign promises into a governing agenda. Mr. Trump, and other Republican lawmakers, are voicing concerns over how quickly to advance a repeal of Mr. Obama's health-care overhaul, which could boost deficits and leave millions without health insurance. The new administration also may ask for billions of dollars for border security after Mr. Trump repeatedly promised to make Mexico shoulder the cost of new security measures.
The nucleus of Mr. Trump's economic team consists of two financiers, Mr. Cohn and Treasury secretary-designate Steven Mnuchin, who in 1994 both became partners at Goldman. They haven't weighed in on the pitched partisan policy battles of the past decade, making them more of a tabula rasa who advisers say can translate into policy Mr. Trump's fusion of traditional GOP support for lower taxes and fewer regulations with his calls to brand China as a currency manipulator and spend more on infrastructure.
The elevation of Goldman Sachs alums also stands in contrast to Mr. Trump's pointed attacks on the investment bank in last fall's campaign. In addition to Messrs. Cohn and Mnuchin, the transition team is considering Jim Donovan, a senior Goldman executive, to serve as undersecretary of domestic finance, a top Treasury Department post.
Perhaps the starkest example of policy idiosyncrasy comes with Mr. Trump's pick for budget director, Rep. Mick Mulvaney (R., S.C.), a committed deficit hawk. He has been deeply critical of Republicans who have sought higher spending and spoke skeptically of Mr. Trump's infrastructure spending push just weeks after the November election.
Throughout the campaign, Mr. Trump championed more spending on everything from the military to infrastructure, veterans' health care and border security while he also brushed aside calls to address to long-run solvency of popular benefit programs such as Medicare and Social Security.
One question now is whether Mr. Mulvaney will prevail on Mr. Trump to rein in his big-spending agenda, or whether he might be tasked by Mr. Trump to sell a short-term boost in federal outlays to his fellow, skeptical House conservatives.
The organizational structure 'may leave everyone guessing about who holds ultimate sway,' said Jeb Mason, a Treasury Department official in the George W. Bush administration."
Importantly, with economic growth anemic, consumers stretched and an economy heading into one of the longest post-recessionary expansions on record, there is little room for a policy misstep at this juncture. Maybe Trump will be wildly successful and the economy will come roaring back. That is a possibility. But there is also the risk it won't. Optimism is one thing. Your personal capital and financial health are quite another. Just some things I am thinking about.