Consumers Becoming Healthier—Part II

Financial FAQs

Consumers seem to be doing better, as I said last week, in spite of their worries about jobs, the economy and budget deficits (their own more than governments’). Consumer credit jumped $17.1 billion in May for the largest increase since the $19.1 billion boost seen in November 2011, which means they are spending more. Gains for the latest month were seen in both revolving and nonrevolving credit.

Graph: Econoday

Nonrevolving credit, which is being driven higher by strong demand for student loans including in the latest month, rose $9.1 billion.  Auto loans also played a supporting role. Revolving credit jumped a giant $8.0 billion which is by far the strongest gain of the recovery. A key question is why revolving credit rose so much. Are consumers more confident about jobs and are more willing to spend?  Are consumers using credit cards to fill in for slumping income? 

The data do not directly answer those questions, says Econoday.  Odds are it is a combination of both.  Consumers with jobs are less worried about a layoff.  And consumers that are underemployed may be resorting to credit cards.  But on a clearly positive note, credit card issuers indeed have returned to the practice of extending credit.  Overall, the boost in credit outstanding is helping to sustain the recovery.

One big mystery is why retail sales have been falling, but once again the Commerce Department is using a seasonal adjustment factor, which means sales may actually be rising, but not as fast as in past summers.

Graph: Calculated Risk

The U.S. Census Bureau said that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $401.5 billion, a decrease of 0.5 percent from the previous month, but 3.8 percent above June 2011. The press release also said that the monthly estimate has a ±0.5 error range, and the annual estimate could be off by as much as ±0.7 percent. And we know unit auto sales are surging, so retail sales estimates are notoriously volatile and subject to revisions.

But there is another adjustment that may be skewing the retail numbers, which don’t adjust for price changes, as we said. That is plunging prices that are putting us into deflationary territory.

Graph: Econoday

Though the producer price index in June edged up 0.1 percent, it followed a sharp 1.0 percent plunge the prior month.  And it had been following sharply since February 2012. This can be attributed to falling demand, of course, but that might be from other parts of the world, like Europe that is falling back into recession, or China that recently lowered its interest rates to boost domestic demand. In April, China’s producer price index (PPI) was negative, and this contraction has since gathered steam. In June, prices fell 2.1 percent year-on-year, suggesting a large part of the economy is already in deflation.            .

But though job worries for the unemployed are paramount, their prospects may also improve in coming months, according to the latest JOLTS report. There were 3.6 million job openings on the last business day of May, little changed from 3.4 million in April, said the U.S. Bureau of Labor Statistics. But what is little about the fact that it is way up from 2.4 million openings at the end of the recession in June 2009?

Graph: Calculated Risk

Jobs openings increased in May to 3.642 million, up from 3.447 million in April. The number of job openings (yellow) has generally been trending up, and openings are up about 18 percent year-over-year compared to May 2011. Quits increased slightly in May, and quits are now up about 6 percent year-over-year. These are voluntary separations and more quits might indicate some improvement in the labor market (see light blue columns at bottom of graph for trend for "quits").

We will have more to report on industrial production, retail and housing sales later in the week. They may show that although the economy has slowed during the summer months, growth should pick up in the fall.

Harlan Green © 2012