There were a couple of headlines this week that caught my eye today.
From Bloomberg: U.S. Consumer Credit Increases by Most in Ten Years on Household Optimism.
Consumer borrowing (CICRTOT) in the U.S. surged in November by the most in 10 years, showing households are optimistic enough to take on debt and banks are willing to lend.
Credit increased by $20.4 billion, the biggest jump since November 2001, to $2.48 trillion, Federal Reserve figures showed today in Washington. The advance was almost twice as big as the highest forecast of 31 economists surveyed by Bloomberg News.
From Nasdaq: IBD/TIPP Economic Optimism Index Improves To 47.5 In January
U.S. consumers were less pessimistic about the economy in January and grew more optimistic about their personal financial outlooks, according to a report released Tuesday.
The IBD/TIPP Economic Index, compiled by Investor's Business Daily and TIPP, a unit of TechnoMetrica Market Intelligence, rose 4.7 points to 47.5 in January from to 42.8 in December.
We've seen similar improvement in the UMich Consumer Sentiment Index:
And the Conference Board consumer confidence index:
Those headlines can help to explain some of the optimism we see as we start 2012, as it continues a theme of momentum in the US recovery.
The S&P index extended its rally today, pushing to a high that was the best since late June. their rally the beginning of the new year which stocks rallying and editing to highs we haven't seen in six months.
The question is whether the recent momentum in the US economy can be sustained
This has been one of the key themes I have focused on my FXTimes webinars, and want to add some charts to give more context to this question.
First, let's have a look at retail sales.
We see that in this shorter timeframe we had a very nice run-up in the middle to end of 2010/early part of 2012, slowed during the summer of 2011, and saw another pickup in September which has now trailed off a bit in October and November.
If we look at a broader measure of consumer spending, which is the measure used to get the personal consumption component of GDP, we see a similar story - a pickup in September followed by weaker personal consumption in October and November. What's important here is the trend in the annual pace (the red line) which after rallying throughout most of 2010, is now falling back below the 2% level at the end of 2011.
That is a worrisome sign. It's more worrisome when we put into context with data that goes back further than 2008 as it could signal another return back towards flat or negative spending.
Next, when you put personal consumption next to its sister indicator personal incomes we see that much of the spending is not being done coincident with rising wages. In fact, wages not only have dropped to zero in annual terms in the second half of 2011 but they've remained there since.
What that tell us is that US consumers have financed their spending via other means and via higher incomes.
Well what are some other avenues consumers can use that may have caused a spending burst?
One of them is to run down savings which were built up following the 2008 crisis as well as in the earlier part of 2011.
Here is a look at savings going back 30 years and we can see that in the past six months US savings have dropped precipitously. That tells us that the likelihood that further consumer spending via running down savings - is unsustainable.
A second option is for consumers to take on new credit - the headline we started the article with.
Now, this had gotten American households into a lot of trouble coming up to the housing bubble in 2008 and the great recession thereafter.
While the labor market has improved of late and perhaps has encouraged consumers to feel confident in taking out new credit, generally as we see in the chart to the right households have been lowering their total debt.
In other words this is another unsustainable path for more spending, considering the lesson learned by many US consumers in running up credit card debt (we could be wrong here, and so have to monitor incoming data).
Therefore while the data from November seems like a positive and encouraging sign that's likely a one-shot deal prior to the holiday shopping season.
The 3rd factor to consider is the decline in gasoline prices in the US over the last half year.
From a high of near $4 a barrel, gas prices have receded down to about $3.25 in December. That has amounted to the equivalent of a tax cut for the US consumers of about $70 billion which explains part of the extra money that consumers had and why they were more confident in spending in September and ahead of the holiday shopping season.
With oil prices now hovering back above $100 a barrel and tensions in the Middle East likely to support oil prices there, if not send them higher, the possibility of gas prices continuing to fall seems minimal and either we stabilize around these levels or we reverse and headed back higher.
Now in this next chart we do see that US drivers have cut back on the amount of miles their driving compared to 2009 and 2010 which can ease the demand for new gasoline and therefore keep prices lower but this is a trend which we will have to see developing further as move through the year.
Therefore, as much of US growth is driven by personal consumption, and the bullish atmosphere in stocks hinges on the momentum in the US continuing, the key factors that helped spending in the second half of the year - running down savings, a boost in demand for credit, and cheaper gas prices - may be drying up.
Therefore, those that may be expecting modest to strong growth in the US in the first half of the year may be disappointed as we get further incoming data.
It's something to look out for and something that we will continue to monitor closely here at FXTimes, especially as we await Thursday's retail sales report for December.