The second half of last year was puzzling to anyone trying to understand future trends in US consumption. Or at least it was to us.
Spending climbed more quickly than incomes, the savings rate decreased and consumer credit increased. Yet this decline in the savings rate happened against a backdrop of further declines in US home prices, followed a big fall in equities during the summer, and coincided with below-average consumer confidence — all of which you would expect to push the savings rate up, not down.
And that’s before discussing where we are in the deleveraging cycle, if it even matters, and other mysteries.
Which explains why so many economists have wondered whether recent consumption trends are sustainable or will reverse. Well, the inveterate optimists from the Deutsche Bank economics team argue the latter. Here’s a summary their reasoning:
First, at least part of the recent weakness in personal income and saving is likely to be revised away over time as income is found to have grown faster than initially reported.
Second, we expect that pent-up demand will support spending this year.
Third, some of the surprising drop in personal saving recently may reflect the reversal of a surprising rise earlier, so that less “catch up” in a direction that would depress consumer spending may be needed going forward.
Fourth, the most recent trend in the stock market has been encouraging, and if it continues, could begin to pose significant upside risk to consumer spending.
The idea is that Americans have put off buying larger items in the last few years, many of which have depreciated to the point where they should soon be replaced –especially if the country keeps adding jobs at its January pace, and if replacements for big items start to be purchased out of desire and not just out of necessity.
We won’t get much into the possible reasons that durables consumption lagged spending on other items during the recession and after — a lot of it has to do with trends in household formation (less need for cars, furniture, electronics, etc) and, relatedly and more obviously, with the simple fact that so many fewer people are now employed than before the crisis. Some have also argued that it was simply an overdue correction from having overbought such items during the pre-crisis years.
Whatever the case, we do find Deutsche Bank’s commentary and charts on this to be instructive. Start with this one:
It shows the fastest-rising components of consumer spending in the second half of 2011, led by cars and related parts, and other big-ticket stuff.
In other words…
After years of holding back on purchases of discretionary durable goods and services during the great recession and sluggish recovery, households may be feeling the need to catch up on some of these purchases.
As evidence that this is the case, the fastest growing components of spending has been on durable goods, including (especially) motor vehicles, recreational equipment, and household furnishings and electronic equipment (Chart 8). Together, these categories along with spending on recreation services, food services, and accommodation, accounted for more than 40% of the roughly 2% AR growth of consumer spending in the second half of 2011.
As for how much pent-up demand is left, plenty it seems. Check out these charts, beginning with one showing consumer durable spending as a share of GDP:
The chart above is easy to understand. There does appear to be a very slow, long-term secular decline in durables as a share of total consumption, but it’s likely that we are still below even that new trendline.
This next chart might require a bit more explanation:
The dark black line represents the annualized rate of car sales, and the “scrappage rate” is the estimate for how many cars get taken to the junkyard each year. Thus whenever sales are below the scrappage rate, the total stock of cars driven in the US is declining.
Deutsche Bank writes that the annual rate of sales will have to reach 15 million to “stabilize the stock of cars per capita”. We’re not exactly sure what this means, but the important point is that the rate of annual sales remains well below the average of the decade before the crisis and, excepting the brief cash-for-clunkers surge, were below the scrappage rate for nearly three years.
And this next chart is even more informative:
Further thoughts from Deutsche:
The single most important element of spending on consumer durables is motor vehicles. Auto sales havebeen on an upward trend since the low reached in the depth of the recession in 2007. That trend was interrupted in the first half of 2011 by supply disruptions caused by the tsunami in Japan. Some of the second half strength reflected a bounce-back from that supply disruption. But the more general uptrend in auto sales reflects a desire to stem the continuing decline in the stock of cars. …
Evidence that the auto stock had adjusted down enough to generate pent-up demand is seen in data on the value of motor vehicles held by households relative to trend income. This ratio was running well above historical averages just prior to the recession and has now moved to the low end of its historical range (Chart 11).
So… we’re convinced that quite a bit of pent-up demand exists.
As for the possibility of consumption not just holding steady but ratcheting up, we’re not sure. It might be contingent on higher rates of household formation leading to even higher demand for big expenditures. And that might depend on continued improvement in the labour market. But, as with the housing market, we won’t pretend to know what will lead what this time round.
Something interesting and ignored in the FOMC minutes – FT Alphaville
What Americans are(n’t) buying – FT Alphaville
A great sign that the auto industry is going to keep going gangbusters – Clusterstock