Friday, April 16, 2010

The Plight of Consumers

The “consumer” is spending. Retail sales jumped 1.6% in March led by auto sales, clothing and furniture. "There's a growing risk that we're underestimating the strength of the recovery," said Stephen Stanley, chief economist at Pierpont Securities, noting that deep recessions tend to be followed by steeper recoveries. "If the economy pops, it's going to be faster than anyone is forecasting." (From Thursday’s Wall Street Journal article “Evidence Mounts of Strong Recovery,”
The only reason I can give for this spending growth is that with interest rates being so low, some consumers just don’t want to hold onto financial assets. They would rather be spending their funds than keeping them in banks or other financial institutions earning practically nothing on their savings.

For sure, the consumer is not borrowing. Total consumer loans are down: according to the Federal Reserve, they declined by 4.4% in 2009. Total consumer loans are down, year-over-year, for the first quarter of 2010.

To keep up their spending, consumers are drawing on their accumulated wealth by reducing the funds they hold in time accounts at financial institutions, retail money funds, and institutional money funds. Again, according to Federal Reserve statistics, small-denomination time deposits at financial institutions are down by more than 22%, year-over-year, in March 2010. Retail money funds are down by over 27% in that same time period and institutional money funds have fallen by more than 19%. (Also see this article in the Wall Street Journal “Money Funds Decline Anew”:

We can track these declines in the non-M1 component of the M2 measure of the money stock.
Although the savings deposit total of the non-M1 component of M2 has increased by 13% year-over-year in March, all non-M1 M2 is showing a negative year-over-year rate of growth.

These funds are going into demand deposits at commercial banks and other checkable deposits at financial institutions. These are increasing, year-over-year, at a 14% and 20% rate, respectively.

Consumers are seriously moving their assets into transactions accounts as opposed to interest earning uses. The interest rates are just too low on these latter items to be attractive.

The consumers have used some of these funds to pay down consumer loans at banks and to reduce credit card balances. There is some indication that delinquencies are starting to moderate or even decline in this area. (See “Rocked by Bad Loans, Card Issuers Stabilize”:
Still, consumers are facing huge problems going forward with respect to the ownership of their homes. Estimates are that one out of five home owners are “underwater” now on their mortgages. Foreclosures continue to rise: in the first quarter of this year, 930,000 foreclosures were recorded, up 7% from the fourth quarter of 2009 and 16% above the first quarter of 2009. Records indicate that 6.0 million borrowers are more than 60 days delinquent on their loans.

This is putting tremendous pressure on the small- to medium-sized banks in this country. (See “Small Banks See Recovery A Bit Further Down Road”: The current practice seems to be: If you don’t make a loan, it can’t turn bad on you! It is hard to see consumer credit picking up soon.

I find it hard to be enthused by the numbers on retail sales, so I must be out-of-sync with these other economists that take away so much optimism from the March numbers.

One piece of information we don’t have with respect to these numbers. It is hard for me to imagine that a person out-of-work or under employed would take the liquid assets they have and spend it on cars, or clothes, or furniture, or restaurants. We still have close to 10% of the work force unemployed and close to 18% of the working age population under-utilized. And, some believe that under-employment could be closer to 25% because of reporting problems. I can’t imagine that these people are going in for “big ticket, discretionary items.”

People that have jobs, that have accumulated wealth, and that manage their assets well see that keeping money in assets that pay less than 2% annually is not very attractive relative to taking out a car loan which, according to Federal Reserve statistics, costs around 5%. In fact, it doesn’t appear that this type of person is very interested in keeping their money in financial assets that pay this little interest at all.

So, this would indicate that we are observing another way in which the American society is bi-furcating. Those that have the wealth and the jobs are continuing to spend, especially in the current interest rate regime that is being pursued by the Federal Reserve. Those that lack these supports are continuing to withdraw as they face the myriad financial difficulties the previous credit-inflation imposed upon them.

The big banks are booming relative to their smaller counterparts due to the interest rate policy followed by the Fed. Those with the wealth and jobs are also prospering relative to their counterparts due to the same policy.