Consumption Capacity = Trending Lower | A Few Quick Updates

08/08/16 12:42PM EDT

Together with the NFP data for July, the Consumer Credit report for June released on Friday provided notable updates on the capacity for domestic consumerism.   

Because household spending remains the singular GDP support – a reality that is likely to persist given global DM weakness and ongoing recessionary capex spending domestically - the trend and outlook for consumption growth remains of obvious import. 

Aggregate Income | NFP Implied Growth = Flat:   Income growth defines the capacity for sustainable consumption growth for most households. With payroll growth slowing over the last four quarters (YoY growth decelerated  further in July despite the “good” absolute gain) and weekly hours largely flat, the modest acceleration in wage growth has not been enough to offset the deceleration in employment and aggregate income growth has slowed.  Consumption growth, unsurprisingly, has shown a similar deceleration.  *Note: for our purposes here, we are defining aggregate income growth as aggregate private sector salary & wage income. 

The sum of aggregate hours growth + earnings growth in the NFP release offers a preview of the official income and spending data released later in the month.    The NFP implied figures aren’t a precision projection but they do offer an insightful directional signal.  NFP data for July imply flat sequential year-over-year growth in aggregate income.  Assuming static savings and credit (more below) trends, consumption growth should reflect a similar 2nd derivative trend.

 

Consumer Credit Growth = Past Peak? 

  • Total Consumer Credit:   Total Consumer Credit growth decelerated for a third straight month in June and at +5.77% YoY has now decelerated ~130bps off the rate-of-change peak of +7.1% YoY recorded in October of last year. 
  • Revolving Credit:  Revolving Credit represents the primary means of pulling forward consumption for most households and the trend of the last two years has been one of acceleration.  Indeed, with aggregate income growth slowing we’ve needed to see ongoing acceleration in credit growth just to maintain a flattish trend in nominal household spending.  Revolving Credit growth was flat sequentially at +5.4% YoY in June and has now been slowing for 3 consecutive months off of peak cycle growth (+6.1% YoY) recorded in March.   

Consumption Capacity | Income + Credit = ↓:  Holistically, and over shorter and medium terms, spending capacity is defined by income and credit growth.  With employment growth slowing, wage inflation and credit growth, collectively, need to rise as fast as payroll growth slows in order to maintain the current pace of household spending growth (again, assuming a roughly flat savings rate).  After supporting spending over the last year and a half in the face of decelerating aggregate income growth, revolving credit growth has now been trending lower for the last three months.   

Employment growth will continue to slow and if wage inflation continues to show only crawling improvement, consumption growth will not be able to maintain its current pace if credit growth continues to decelerate – particularly with consumption facing its toughest compare of the cycle in 3Q16. 

Consumption Capacity = Trending Lower | A Few Quick Updates - Reported   Implied Income

Consumption Capacity = Trending Lower | A Few Quick Updates - Consumption Capacity 1

Consumption Capacity = Trending Lower | A Few Quick Updates - Consumption Capacity 2

Consumption Capacity = Trending Lower | A Few Quick Updates - Revolving Credit Growth

Consumption Capacity = Trending Lower | A Few Quick Updates - Consumer Credit Revolving   Total

Consumption Capacity = Trending Lower | A Few Quick Updates - PCE YoY

Consumption Capacity = Trending Lower | A Few Quick Updates - PCE Comps

Christian B. Drake

@HedgeyeUSA

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