Ezrati’s Economic Outlook: Consumer Better Off Than Most Seem to Think

Overtime, cheaper gas and lower debt service obligations should all support spending.

Amid the country’s diverse economic problems, it is easy—too easy—to focus on the dark side of everything. However much material there is on that unattractive side of the ledger, people should not lose sight of positive developments. Especially where the American consumer is concerned, matters have improved markedly over the last four years, although they’re still far from universally robust. With consumption making up some 70% of the economy, the improvement raises serious doubts about today’s popular and sometimes extreme pessimism, especially the frequent forecasts of another recessionary dip.

To be sure, the poor jobs market raises all sorts of legitimate questions about the resilience of the consumer sector and consequently the entire cyclical recovery. As of June, the Labor Department reported that people on nonfarm payrolls totaled just 133 million. Though that’s a gain of over 4 million from the low during the 2008-2009 recession, the level still speaks to a subpar recovery in which net new jobs growth has averaged barely over 100,000 a month, not even one-third the average in a typical recovery. After more than three years of recovery, the economy remains some 5 million jobs short of its previous peak.

But if jobs growth is disappointing, not the least for the millions without work, it is far from the whole story on the consumer. In this recovery, American industry has relied inordinately on overtime and upgrading workers’ skills, which has helped the spending power of the more than 90% of the workforce who have jobs, even as it has frustrated job seekers.

In particular, overtime has expanded the average work week in the private economy to almost 35 hours, from 33 during the recession. Because many earn time and a half for those extra hours, it is hardly surprising that average weekly earnings have risen by a whopping 36% above pre-recession levels. As a result, personal income has grown a lot faster than the raw employment figures would suggest. Wage income in the private economy, for instance, expanded at an annual rate of more than 4.5% so far this year, despite the paucity of hiring.

Consumer spending has other supports in addition to income. Households have also reduced many encumbrances on their income flow over the past few years. Debt service obligations have fallen to slightly over 16% of after-tax income, well down from almost 19% just before the recession and even from the 16.4% registered a year ago. Indeed, today such obligations stand at lows not seen since 1993. The relief has effectively given household budgets an added fillip above what they got from wage growth of about half a percent during the past year and more than 2.3% since the recovery began in 2009. This improvement helps explain why consumer spending has expanded despite subpar employment growth and can continue to do so even if the jobs picture continues to disappoint.

Offering further relief to household finances and so supporting consumer spending has been a drop in debt charge-offs. According to the Federal Reserve, some 1.24% of total loans and leases were charged off in the first quarter, the most recent period for which complete data are available. A year ago, charge-offs ran at 2.27%, after peaking at over 3% late in 2009. Improvement has occurred in mortgages, where charge-offs have fallen from a peak of 2.8% late in 2009 to 1.44% most recently. Credit cards have shown the most progress, with charge-offs dropping from a peak of 10.26% in late 2009 to 4.25% most recently. Though none of this improvement necessarily puts money in the consumer’s pocket, by lifting a cloud of fear it has no doubt encouraged easier spending.

The drop in gasoline prices does effectively put money in the consumer’s pocket. Since last April, when gasoline broke above $4 a gallon in much of the United States, the price has fallen on average by some 65 cents, or almost 16%. The average American spends between 8% and 9% of his or her household budget on gasoline, so the price decline has effectively freed up an additional 1.4% for general consumption. Though the figure may seem small stated in this way, when taken across all household budgets, it equals some $160 billion. Put another way, it is the equivalent of a 1.2-percentage-point drop in average income tax rates. So far, this relief has not shown up in measures of consumer spending except as a drop in nominal spending on gasoline. It almost certainly will boost general spending flows.

None of this points to a boom in the consumer sector or elsewhere in the economy. Employment remains an important consideration and so far a source of weakness in the growth equation. Neither do these observations stand as proof against adverse shocks. But the improvement in household finances and cash flows does nonetheless warn against the great temptation to see matters in an entirely negative light and against the forecasts of impending recession that inevitably emerge from such sentiments.




About the Author

Milton Ezrati

Milton Ezrati

Milton Ezrati is senior economist and market strategist for Lord Abbett & Co. and an affiliate of the Center for the Study of Human Capital and Economic Growth at the State University of New York at Buffalo. His latest book, Thirty Tomorrows, linking aging demographics and globalization, will appear next summer from Thomas Dunne Books of St. Martin’s Press. See more of his articles about the economy here.



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