Eyes on the Consumer

The Atlanta Fed Macroblog has All Eyes on the Consumer.

It appears that the first quarter may have been even worse than we thought. The CNBC Rapid Update consensus estimates from a panel of forecasters registered a decline of 0.3 percent as of yesterday.

Clearly, the year didn’t start out so well, but here at the Atlanta Fed we have not yet lost faith. We are sticking to the narrative that 2015 will be another solid year of recovery.

Faith Based Economy

Why does the Macroblog have faith in a strong recovery? They base it on faith of A Linchpin of Consumer Spending] Growth of Atlanta Fed governor Dennis Lockhart.

What’s up with the consumer? It’s puzzling. The fundamentals supporting consumption growth seem strong. I consider consumer fundamentals to be real personal income growth, household wealth, access to credit, and consumer confidence. Consumer confidence is, in turn, highly influenced by the broad employment outlook.

Let’s look at these factors. Growth of real disposable income (income after taxes, inflation-adjusted) jumped in the first quarter, partly because falling gasoline prices brought a decline in overall consumer prices. And real income is up almost 4 percent over the past year.

Puzzling Not

I don’t believe it’s puzzling. Incomes are up, but so are medical costs. Fast food prices are poised to jump due to minimum wages hikes.

Here’s the most important factor: 1 in 4 renters spend half their income on housing, a paycheck away from homelessness

For more than one in four renters in the US, housing and utility costs take up at least half of their family’s income, according to a new analysis of Census data. That number is up 26 percent since the beginning of the Great Recession in 2007.

The situation is nearly as dire across the nation. In Ohio, Alabama, Maine, Tennessee, Montana, and South Carolina, about 25 percent of renters dedicate half their income to rent and utilities. In fact, at least 20 percent of renters in every state, excepting Alaska, South Dakota, and Wyoming, face similar situations, according to the nonprofit’s analysis of 2013 Census figures.

It’s not just lower income Americans who are in precarious positions. A third of higher income Americans are living paycheck-to-paycheck — even when they earn $75,000 a year — due to a lack of prioritizing for retirement, according to a recent survey.

And those are 2013 figures. Rent has gone up more than wages. So has cost of medical care. And who needs more junk anyway?

Nonetheless Macroblog presses on based on a model.

Spending Model

The chart below illustrates an experiment based on a simple model that incorporates President Lockhart’s description of “fundamentals.” To be even more precise, we ask the following question: What would we have predicted for consumer spending growth during the past four months based on the history of actual consumer spending and its relationship to income, employment (and unemployment), confidence measures, and wealth (specifically, equity prices)? We also threw inflation and oil prices into the mix for good measure.

In other words, the “fundamentals” suggest the four-month annualized growth of consumer spending should have been in excess of 4 percent, as opposed to the approximately 1.5 percent we actually saw. That is a story we don’t expect to persist, and our current view of the year is that first-quarter consumer spending results are not indicative of future performance.

Consumers are, of course, a forward-looking bunch, and it is possible the recent weak spending reflects a looming reality not captured by the simple model described above. But our forecast for now is that consumers will move to the fundamentals, and not vice versa.

As President Lockhart said in Louisiana: “Stay tuned.”

Stay Tuned

Yes, please stay tuned. Meanwhile, note Gasoline Prices Rev Up for Summer. The price of gas at the pump is up 31% since January.

But hey, keep the faith.

Mike “Mish” Shedlock