Don’t be deceived by the so-called comeback in economic
activity. What we are witnessing is only
the expected catch-up after the extreme winter weather. Overall economic growth is merely returning
to the tepid trend that was in force prior to December.
When economic activity is disrupted by short-term events
such as weather the month-to-month figures can be highly misleading, and it is
more meaningful to look at the year-over-year results. In last week’s comment we showed how this
applied to the data on housing, production and employment. Today’s economic release on consumption and
income was more of the same. Real
disposable income for March rose only 2.2% from a year earlier. Real consumer spending was somewhat higher
only as a result of the drop in the household savings rate to 3.8%, the 2nd
lowest rate since the recovery started five years ago. With income growth still weak and the savings
rate this low, the prospect for strong consumer spending in the period ahead is
The jobs picture is no better. The consensus for the
estimated payroll increase for April is about 215,000, which would mean
year-to-year growth of 1.66%, compared last November’s annual rise of
1.82%. Just to return to this number,
jobs would have to jump by 430,000. Even
after an increase of 215,000, the total number of employed would remain 207,000
below the number at the start of the recession in December 2007.
Furthermore, most of the jobs increase since the lows was
in in the lowest paying jobs. These jobs
accounted for 22% of the job losses in the recession, but 44% of the jobs
gained back in the recovery. Given these
numbers, it is no wonder that consumer spending has been so restrained during
the last few years.
The tepid recovery should also be seen in the light of
our long-held view that economic growth following debt crises and excessive
debt build-up is below average for a lengthy period of time. At the peak, household debt amounted to 129%
of disposable personal income (DPI), compared to a 62-year average of 76%. As late as 1992, the percentage was still
82%. While household debt has declined
to 103% of DPI, there is still a long way to go before approaching anywhere
near the mean, and this creates a strong headwind for consumer spending.
When the subdued recovery is combined with high
valuations, a deteriorating technical condition, an unstable situation in China,
the slowdown in developing nations and the numerous geopolitical bombshells,
the market outlook remains highly risky at current elevated levels.