February 19, 2021 | 16:06
American Shoppers: Start Your Engines
The blowout retail sales report that triggered a big upward revision to our growth outlook this year might just be the start of the best year for American consumers since 1955. From an income and financial perspective, the average household is primed to spend and not just on deferred services, dining, and travel.
Let’s start with the income side. Rebate checks and extra UI payments, together with a small rebound in jobs, likely spiked personal income by around 10% in January alone. This could hike the saving rate to 19% from an already-high 13.7%, in turn, raising the accumulated excess savings in the pandemic to nearly $1.7 trillion. That’s 12% of nominal consumer spending firepower. Moreover, an even larger tranche of rebate checks is currently working its way through the reconciliation process, which will be pure gravy for the majority of households whose incomes were untouched by the pandemic. Beyond the massive fiscal fillip, rising employment will support incomes, with nonfarm payrolls expected to rise by more than five million this year. Wages are also going up. Some big retailers that thrived during the pandemic are raising pay, with Walmart the latest to announce an increase for some workers. And don’t forget a potential hike in the federal minimum wage (though it will be spread over several years). Although firmer inflation will erode spending power, wages are expected to rise faster than prices due to productivity growth.
Things are equally rosy on the balance sheet of the average household. Household debt is growing moderately and sustainably. It rose just 2.9% in 2020, led by a 5.1% sprint in residential mortgages, according to the New York Fed. As a share of disposable income, debt has trended lower after peaking at 116% in 2008, reaching 86% before the pandemic and falling a little further due to the income-support programs last year. Similarly, debt service costs fell to record lows (back to 1980) before the pandemic and now consume 9.1% of disposable income (as of 2020Q3). The debt burden will shrink further with incomes rising sharply this year, even if interest rates nudge higher. Although the recent decline in delinquency rates is likely to reverse when forbearance programs end, rising employment will limit the damage. Unlike prior to the 2008 financial crisis, the vast majority of mortgage originations are from households with high credit scores. Moreover, with the value of assets outrunning debts due to escalating house prices and lofty equity values, rising wealth should continue to support spending this year.
The upshot is that, barring a third wave of the virus and a return to strict shutdowns, there is little to prevent consumers from spending up a storm. After contracting nearly 4% last year, we see real consumer spending rising just over 7% this year, the most in 66 years. For businesses that barely survived the pandemic, the cavalry is coming to town.