The US consumer isn’t so mighty

It’s no secret the US economy keys off consumption. On that count, it’s beginning to look less and less like an expanding economy. Whether it’s the internals of the first-quarter GDP report or the source of March personal spending, the trend is not the friend of growth in coming months.
Some of it comes down to the state of US workers’ paychecks. Adjusted for
inflation, personal income excluding government transfers peaked in December and declined at a 3% annual rate over past three months. That helps explain consumption’s punk 0.8% contribution to first-quarter GDP, the lowest in a year.
Digging into March’s personal spending data, the headline once again belied strength. On surface, spending of 0.9% was as robust as it gets even after adjusting for inflation, which took it to 0.7%. Net out biggest savings drawdown in six years, however, and you arrive at a decline of 0.2% for March.
As for what’s pushing households to tap into their rainy-day funds, Deutsche Bank recently pointed to the 15 percent year-on-year increase in household interest payments. Levels of payments rising at a similar pace preceded the onsets of the last two recessions.
Is it any wonder credit-card issuers are bolstering their cushions to absorb future losses? And it’s not just Capital One that caters to lower-credit quality borrowers. All seven of the largest US card issuers boosted their charge-off rates in the first quarter to an average of 3.82 percent, an almost seven-year high.
Mortgage lenders are reporting similar strains. According to Knight Black’s latest Mortgage Monitor, a typical first quarter sees the national delinquency rate decline by 15 percent as borrowers use tax refund proceeds to catch up on their household finances.
While that’s a bit of a stretch 2019’s tax season was nevertheless been a shock of historic magnitude to household budgets. Add up what Uncle Sam did not pay out in tax refunds and how much more households paid up in income taxes vis-à-vis 2018 and you arrive at $29 billion.
While that figure may not seem sufficient to move the needle, it was likely a surprise to households. That’s $29b less in the way of splurging or righting your financial ship, depending on circumstances.
Little wonder that according to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, banks tightened lending standards for credit cards in the first quarter. This belt-tightening should come as no surprise given the four largest US banks booked $4 billion in credit card charge-offs in the first quarter. That compares to $656 million across all other consumer loans, representing the widest gap since at least 2009.
The economy may be going gangbusters as job gains defy estimates, but something is amiss in the household sector, the driving force behind the world’s biggest economy. The Fed may want to look beyond the headlines before making its next “solid” assessment of the economy backed by a labor market that “remains strong.”
—Bloomberg

Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” and founder of Quill Intelligence.