Face-off: Consumer Strength

For many observers the continuing strength in consumer spending is a complete mystery. It could be down to payday loans and if this is something you’re considering, lendingexpert.co.uk explains what you should look for in a payday lender.
  The basic story is that the consumer is tapped out.  Since the consumer is 70% of the economy, there can be no recovery.  It is a story that captures the imagination, presenting a believable stereotype of a complex population.

I will look more carefully at this important question.

Background

In “Face-off” my
mission is identifying and writing about the best sources on a topic.  I
seek out expertise and explain the arguments.  This is in sharp
contrast
to most others who purport to be experts on nearly everything.  By
comparison, my claim is quite modest!

I am highlighting a series of key issues for the individual investor — things you need to know about right now.  Since most people are drawn to sources that confirm their existing viewpoints, I try to find a strong representative for each side.  Anyone chosen for “Face-off” should be taken seriously.

The Protagonists

Readers
should understand that the protagonists in “Face-off” do not know that
they are participants.  They have not seen the commentary of their
putative opponent.  This is a device for making stark contrasts in
opposing viewpoints about issues.  Anyone who is cited is most welcome
to join in the discussion.  I guarantee a complete opportunity for
rebuttal.  In fact, that would be helpful to everyone.  Meanwhile, their loyal adherents are invited to participate in the discussion.

The Bearish Viewpoint

Edward Harrison of Credit Writedowns, now added to our list of featured sources, takes a skeptical perspective.  To get the entire story you need to visit his site and check out some other articles as well as this one, but here is his take on spending:

…this is an unsustainable trend. Something has to give eventually: either
incomes will have to rise more quickly to sustain the rate of growth in
consumer spending or spending growth will have to come down to the
lower level of income growth.  With huge slack in the US labour market,
all indications are that income is the weaker link.

Once again, you need to read his other articles, especially the interpretation of GDP.

The Bullish Perspective

Brian Wesbury and the First Trust Advisors team has done a good job of analyzing the recovery.  They now have an economics blog, now added to our list of featured sources.  They report a fact that will surprise nearly all readers:

Real consumer spending is now higher than it was before the recession started!

Here is their interesting graph:

And here is the explanation:

Some analysts remain befuddled by the gains in spending given what they believe are continued high debt levels.  However, they are missing the fact that workers can both increase their spending and continue to pay down debt, just as long as debt reductions are slower than before or incomes are rising.  Here’s a simple example.  If you made $50,000 after taxes last year and paid down $10,000 in debt, you could spend $40,000.  If you make the same $50,000 this year and only pay down $5,000 in debt, you can spend $45,000!  No longer in a panic, US consumers are starting to pay down their debts at a slower pace and after-tax incomes are 3.4% higher than a year ago.  Private sector wages and salaries increased at a 3.1% annual rate in Q1, the fastest pace in more than two years.