Consumer Spending Up, While Leverage Modest

Consumer Spending - Stocks Not Overhyped

Consumer spending is up. Whether stocks are showing signs of exhaustion depends on which indicator you review.

The CNN Fear and Greed index makes me cautious about stocks in relation to consumer spending, but the Investor Movement Index seen in the chart below shows investors are still cautious.

TD Ameritrade's Investor Movement Index was 5.45 in July which is exactly the same as June even though July was the best month for stocks since January.

This index was flat because, even though TD Ameritrade clients were net buyers of stocks, there was lower relative volatility among the most widely held stocks. These include General Electric, Apple, and Amazon. All of these stocks are related to consumer spending.

The index is much lower than the peak in December.

To be clear, sentiment indicators only help us forecast short term movement. Earnings growth will determine long term prices.

Every index showed stocks were wildly overbought in January. Some were at all-time records. Despite the peak in sentiment occurring in January, the equity market is about to make a new record high in August.

That didn’t represent the peak of this bull market because earnings reports have beaten estimates and future estimates have been raised.

Consumer Spending - Strong Redbook Sales Report

The Redbook year over year same store sales growth in the week of August 4th, 2018 was 5.6% which beat estimates for 4.2% growth.

As you can see from the chart below, this growth rate is near the highest of this cycle. The highest ever reading was 7.6% which is 2 points higher. The average growth rate since 2005 has been 2.35%, showing us how strong this report was.

The lowest reading was in July 2009 when the index declined 5.8%. This report showed 1.4% acceleration from the prior week and was the fastest growth rate since December.

This report counteracts the middling economic reports and the negative real wage growth. Yes, we can have good and bad reports come out simultaneously because they have different ways of measuring data.

Month to date sales were up 0.9% and the full month year over year gains were 4.2%. This report showed acceleration which caused growth to beat the previous year to date peak which was 5.2% in early July. This means there will be strong consumption growth in ex-gas and ex-auto sales.

Consumer Spending and Credit

The consumer credit report is from June, so it doesn’t align with the Redbook report from early August. That being said, consumer spending was also strong in June as real consumption growth was 4% in Q2. It’s impressive to see the lack of credit taken out considering how much money was spent. The consumer hasn’t taken out much leverage this year besides the big spike in May.

Consumer credit increased $24.3 billion in May and was up $10.2 billion in June. The June report was lower than the consensus for $16 billion. Consumers as a whole actually paid off some of their credit card bills. That’s impressive considering the historical propensity for consumer spending increases when household wealth increases.

Revolving credit, which is credit card debt, had its biggest increase since November in May. Consumers paid off $0.2 billion in debt in June. It’s a great idea to get your finances in order when the labor market is strong and stocks are rising.

However, Americans typically avoid doing so. This cycle has been different because Americans still remember the 2008 financial crisis. It’s amazing how popular stories on that recession are even in 2018. That makes it seem like the economy still isn’t close to a recession as consumers have deleveraged and some investors have recency bias which prevents them from becoming euphoric.

Non-revolving credit growth, which measures student loan growth and vehicle financing, was $10.4 billion. The good news is the student loan delinquency rate and the rate of student loan debt growth are falling.

Great JOLTS Report

The June Job Openings and Labor Turnover Survey showed great numbers which isn’t surprising since the labor report showed 248,000 jobs were created. The JOLTS report shows there were 6.662 million jobs created which beat estimates for 6.650 million.

The May report was revised from 6.638 million to 6.659 million. Year over year job openings were up 8.8%. The number of hires was actually down from 5.747 million to 5.651 million. The fact that openings are greater than hires means that workers aren’t meeting the skill and experience requirements employers have for jobs.

As you can see from the chart below, there are still more job openings than unemployed people which means the labor market is nearly full.

Which also can account for the increase in consumer spending.

The number of separations which includes quits, layoffs, and discharges increased from 5.419 million to 5.502 million.

As you can see from the chart above, the separations and quits rate were unchanged at 2.3%. The chart implies the average hourly earnings growth rate should be quicker than the current rate because the labor market is almost full.

However, the 2008 recession caused many workers to stay on the sidelines for a while which means there is more slack in the labor market than meets the eye. The total layoffs and discharges were up 0.1% to 1.2%.

The job openings rate was unchanged at 4.3%. It was the highest in the food service and healthcare and social assistance industries.

The hiring rate was up 0.1% to 3.7% with arts, entertainment, and recreation having the highest rate which was 7.4%. In the past year, hires were 66.6 million and separations were 64.1 million which means employment was up 2.5 million.

Conclusion

There was a lot of good news in this article as the labor market was strong in June, which increased consumer spending.

Also, the consumer isn’t taking out excessive leverage. Finally, the stock market might not be overbought despite being at its all-time high.

Personally, I think the labor market is strong and the consumer is in great shape. However, I trust the CNN Fear and Greed index more than the TD Ameritrade index which means I think it is ripe for a small pullback of about 3%.

 

 

 

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