August reinforced the perennial fear of this recovery: insufficient growth. While the economic data has started to stabilize, the global economy, particularly the manufacturing sector, remains fragile. However, for the umpteenth time this recovery, the U.S. household sector appears to be keeping the global economy out of the abyss. The good news: This is likely to continue.
What is keeping the U.S. consumer thriving? I’d cite five factors.
- Solid income growth. Average hourly earnings are up 3.2% year-over-year. While this is modest by the standards of past recoveries, wage growth is currently at the cycle high and comfortably ahead of inflation. The combination of accelerating wage growth, solid job creation and modest inflation means that aggregate real disposable income is growing at nearly 3%.
- Low rates. While low interest rates are not engendering the same type of housing or refinancing boom we’ve seen in previous cycles, they are supporting the consumer in general and housing in particular. Recent months have witnessed an acceleration in home sales, an important tailwind for the broader economy.
- Higher savings. Unlike the previous decade, U.S. consumers are demonstrating uncharacteristic restraint. The household savings rate is a healthy 6.2%, roughly triple the 2005 low.
- Households are richer. Higher savings coupled with an unusually long bull market have pushed household wealth to a record high, over $113 trillion. The current level is roughly 60% greater than it was on the cusp of the last recession.
- Lower and more sustainable debt levels. Perhaps the biggest difference versus last cycle: consumers are less indebted. On the eve of the financial crisis consumers were contending with record levels of debt (see Chart 1). At its peak in 2007, household debt was more than 130% of disposable income. Today household debt is less than 100% of income. Not only are debt levels lower, but thanks to historically low yields the cost of servicing the debt is near an historic low.
Healthy consumer, healthy profits
A robust consumer, along with relentless cost cutting and a shift towards more profitable services, has led to record levels of profitability for consumer discretionary companies. While some segments, notably department stores and select specialty retailers, are struggling, the overall sector is in exceptionally good health. With a return-on-equity (ROE) of 28%, the consumer discretionary sector is second only to technology in terms of profitability.
None of the above suggests that the U.S. consumer is bullet proof. The aggregate numbers mask significant differences by household, a function of widening wealth inequality. To the extent less of the wealth and more of the debt is held by lower and middle-income households, this may suggest a lower propensity to spend than suggested by the headline numbers. That said, recent data suggests that some of the best income gains are concentrated in lower income households. All of this suggests that, once again, it is probably a mistake to bet against the U.S. consumer.