Back to School Means More Retail Agony
It’s beginning to look a lot like Back-to-School season. If this year’s results faintly resemble those of last year’s holiday shopping season, this fall could pull forward another wave of misery for brick-and-mortar retailers. But it won’t be the usual suspects dragging down spending.
It’s been evident for some time that the paycheck-to-paycheck cohort is struggling to make ends meet. Though income tax refunds helped some borrowers catch up, 60-day subprime auto loan delinquencies closed the quarter at 4.6 percent. That doesn’t match its prior peak, but the rate is nevertheless up 12 percent compared with last year. Meanwhile, the charge-off rate for large U.S. credit card issuers rose to 3.3 percent, a four-year high and the fifth consecutive quarter of year-on-year increases.
It’s notable that inflation-adjusted disposable incomes declined for the first time this year in June. The mirror image is the saving rate: at 3.8 percent, at a decade low. The implication is that the near record high in revolving credit outstanding, mostly credit cards, signals households using their credit cards to cover the cost of necessities, a typical late-stage economic cycle development.
Part of the deterioration in both auto and credit-card performance reflects the relentless march upwards in rents, the largest component of a typical working household budget. As of the latest consumer price index report, rents are up 3.9 percent over the last year, a cycle high. It’s no wonder that, at almost 9 percent, the ratio of total rental income to total U.S. wages is the highest on record in data back to the early 1960s. While this bodes well for those on the receiving end of rents, it is debilitating for those on tight budgets.
It’s safe to say that absent a fresh spurt of growth in high-paying industries, the credit cycle has peaked and rolled over for the current cycle.
The question is, does that matter for near-term economic prospects even as the recovery pushes into its ninth year? The most bullish forecasts have baked in upside growth in the second half attributable to an "inevitable" bounce in inventory investment. Hopes are running high for follow-through strength in the industrial sector.
And then there is residential real estate. Builders, for one, still profess optimism. Expectations for future sales, as gauged by the National Association of Home Builders, remain near cycle highs, close to the peaks of the prior two cycles. It would certainly be welcome news if their enthusiasm was validated by a pickup in activity; sales for the first half of the year are flat compared with last year.
Besides, the U.S. is a consumption-led economy. Stocks continue to hit fresh highs, which should keep high-end consumers’ wallets open and consumption growth intact given the outsize contribution to retail sales.
Although many measures exist, none of them perfect, data from the Bureau of Labor Statistics suggest that upper-income households account for a majority of new and used auto sales, home purchases and mortgage interest income, property tax revenues, and furniture and appliance sales.
Given the robust backdrop for their investment portfolios, why is it that upper-income households are so hangdog? At least that’s the impression they gave when the University of Michigan called on them in late July.
It’s safe to say the upper-income households’ confidence has slumped. Buying conditions for large household durable goods slipped to a three-year low and auto-buying conditions tumbled to a six-year low. As if on cue, one car manufacturer after another reported July sales had disappointed. And finally, they perceived home buying conditions to be the worst in nine years.
Policy makers at the Federal Reserve and politicians alike would be wise to pay heed to the message of this trend and how history has played out at similar junctures.
Some perspective on what’s to come is merited, given the University of Michigan surveyed households before the Senate’s failure to repeal and replace the Affordable Care Act.
As for the headlines that could mute those back-to-school promotions, they’ve already begun despite, or perhaps because, Congress has recessed. Economists and investors in consumer discretionary sectors would be well advised to pay heed to any further dampening in confidence that stems from fears of a government shutdown. It wouldn’t be the first time the complacency-cloaked stock market proved to be the last man standing.
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