Consumer borrowing fell at a 5.6% annual rate in February to $2.45 trillion according to the latest Fed statistics. Consumer borrowing (which includes most loans outside of real estate) had increased 2.1% in January, reflecting how borrowers typically slow payments after running up card balances over the December holidays. Consumer credit has fallen in 12 of the last 13 months and consumer credit outstanding has slumped by $134bn since peaking in July 2008 as household wealth collapsed after credit and asset bubbles popped. However, as the charts indicate, the debt to income ratio has only declined to 22%, still a historically very high level. A $5.6 billion upward revision to January, to plus $10.6 billion, takes the sting out of February's contraction as do preliminary indications for strong retail sales in March.
In fact, far from a conscious decision to deleverage, it seems from recent retailer newsflow that US consumers were simply trapped at home by snowdrifts in February, and as soon as the thaw came they rushed down to their local mall to swipe some plastic. The latest data on US consumer spending and incomes highlight the absence of any real return to sanity; equity withdrawal from housing has been replaced by government transfers as a supplement to stagnant earned incomes. Personal spending rose 0.3% in nominal dollars in February over the prior month, in-line with expectations, while personal income was flat. Not surprisingly, the personal savings rate fell to 3.1%, levels not seen since late 2008.
Real consumption is effectively back at pre-recession 2007 peaks, and rising despite real ex-transfer income being down roughly 7% from its peak and stagnant for the past 6mths. There is no precedent for the current situation where real consumption is greater than real ex-transfer income; the explanation lies in the surge in government payments to the point where they account for 18% of household income on average. Total real transfer payments rose to over $2 trillion for the second time ever in March, on an annualized basis, or almost 15% of US GDP. Social security in all its varied forms has replaced equity withdrawal from housing inflation an ATM to supplement earned income. The surge in the savings rate last summer to 6% reflected a temporary hoarding of government rebate checks, rather than any effort (or in many cases ability) to save from earned cash income.
The Fed’s reflation medicine is working all too well; zero interest rates have prodded investors along the risk curve in search of yield, driving risk assets higher (and particularly the lowest-grade corporate bonds which in the US have been the prime beneficiary of an $800bn switch from money market funds). The personal savings data bears close scrutiny going forward. One possibility is that it shows the effect of another part of the huge baby boomer cohort moving into a somewhat premature forced retirement (the unemployment rate for men over 55 is at an all-time high). Anecdotally, it seems that many have decided, encouraged by the market rally, to partly fund themselves by running down their assets. Many middle-class boomers have plenty of assets in their 401k plans, but the effects on financial markets of them moving from the asset accumulation to the asset eating stage of life would be very negative for stocks (and indeed a demographic shift as much as overvaluation has been one key factor undermining equity performance over the last decade). All of this helps boost a cyclical recovery in 2010, but exacerbates the destructive structural trends that economic 'rebalancing' via higher domestic saving, investment and exports was meant to address. Whereas China has taken real steps to rebalance its economy toward higher domestic consumption since the crisis, and driven the wider Asian recovery in doing so, the US has talked a good game but instead chosen to prolong an ultimately unsustainable overconsumption path via an explosion in public debt. That choice merely postpones a painful adjustment in living standards, for at most a couple of years.
