The U.S. consumer is still losing spending power and yet, they’re spending more than they have since 2007, according to the latest data from Deutsche Bank.
Bank economist Joseph LaVorgna points to their quarterly analysis of “buying power,” which they calculate by looking at personal income less costs, cash flow, consumer credit, and home values.
Photo: Deutsche Bank
What’s interesting about this data table is that while buying power’s decline is slowing it is still moving in a negative direction. That’s largely because of home prices, the deflationary drag on consumer spending in the U.S. economy.
But there’s reason to believe that the situation’s improvement will not be short lived, and its pace should actually increase.
From Joseph LaVorgna (emphasis ours):
While this marks the fourth year in a row in which buying power declined, three points are worth making: One, the rate of decline is slowing sharply. The latest drop is smaller than 2009 (-$101 billion) and is significantly smaller than either 2007 (-$1.9 trillion) or 2008 (-$3.0 trillion). Hence, the trend in buying power is getting better even if it has yet to turn positive. Two, the aforementioned improvement in the labour market should steady home prices, especially with residential rents on the rise. Fundamentally, housing is cheap, especially if the unemployment rate continues to fall. Three, consumer spending, as shown in the last line of the table, has been strengthening despite negative buying power; nominal consumption expenditures totaled nearly $400 billion last year, and the February retail sales report points to further decent spending gains in Q1 2011. Not with standing soft buying power, a primary reason why consumer spending has turned up is due to the rise in equity prices: they have offset the drag from housing and aided critically in the repair of household balance sheets.
This clearly presents two dangers to the U.S. consumer recovery. One, that a continued decline in home prices, as evidenced, will hurt spending. There has yet to be any clear sign that the jobs recovery is driving those prices higher, and rising fuel price inflation may threaten the market too. Second, the reliance on equity prices here puts consumer spending at risk if we see a pro-longed or significant decline in stock prices.