Economic indicators continue to show signs of a slow steady recovery, likely to continue far longer than most would predict. I find it surprising that the pundits expressing concern over the future of the economy are not seeing the contradiction in their own statements. For instance, consider the following statements heard frequently:
- The recovery from the "Great Recession" is unimpressive with growth well below normal recovery trends.
- The recovery from the "Great Recession" is now long in the tooth, approaching the end of a normal recovery life cycle.
I look at these two facts analytically and my bias is to conclude a higher probability of a continued recovery rather than slippage back into another recession. Naturally there are many other indicators that will confirm or refute this bias, but I admit to it being there and confusion when I hear others point to these as reasons to be fearful.
Our economy is driven by the consumer. Household spending represents 70% of US GDP. Consider the following:
- A few days ago the Bureau of Economic Analysis released the May 2014 Personal Income and Outlay Report. Disposable Personal Income (DPI) increased $55.6 billion or 0.4%. Personal Consumption Expenditures (PCE) increased $18.3 billion or 0.2%. Personal saving was 4.8% of DPI at $620.3 billion, up almost $40 billion sequentially. Summary: Consumer financial health is improving.
- A May Wall Street Journal article did a decent job highlighting consumer debt trends of late. Summary: Consumers added debt for Mortgages ($116 billion), Student loans ($31 billion) and Auto loans ($12 billion) in Q1 2014. They resisting discretionary spending which showed up in a decline in credit card debt ($24 billion). We've argued for two decades that the consumer debt load, especially credit card debt, was excessive and would need to be reduced. Now we are seeing it which leads to slower retail spending and slower growth. But a healthier consumer equals a consumer able to spend in the future.
- Job growth continues to be stronger than economic growth. Makes sense intuitively. High unemployment rates and significant declines in personal wealth from the recession and the housing market crash means household need to regain financial health and we are seeing that.
- Reduced unemployment, improved household savings and reduced credit card debt are all positives with respect to household finances. Add to that mix, a bullish stock market and it's not surprising to see consumer sentiment improving above expectations.
Yes this is a pretty simplistic way to evaluate the health of the US economy. But sometimes simplicity is all you need. We have a poor retail environment which is directly attributable to consumers being more concerned with reducing discretionary debt and increasing household savings. That translates to improved consumer health. We can't have a long recovery period if we don't have consumer health. The US consumer is feeling more confident, investing in housing, autos and education instead of disposable consumption and putting more money into savings. That seems perfectly consistent with a long-lived slow growth recovery. Enjoy it while watching for real indications that something is changing.