The main prop under this long-in-the-tooth bull market has been consumer spending. Despite higher oil prices, rising interest rates, burgeoning unsecured debt and non-existent savings, consumption has continued at a robust pace.
Relentless spending may finally be coming to an end. Nouriel Roubini focuses on falling retail sales:
Last week it was pointed out here that the growth deceleration would worsens in Q2 relative to Q1 as private consumption would weaken:
March stole consumption from April and Q2: the early Easter this year pushed Easter spending from April to March; and the good weather in March stole spring clothing and other spending that usually occurs in April and spring. Indeed major retailers such as Target and Wal-Mart are now predicting falling sales in April. Also, as discussed in previous blogs here the five main determinants of private consumption – labor/income generation, effective interest rates, wealth, debt and debt-servicing ratios, and consumer confidence – are all showing signs consistent with consumption weakness.
There is now first evidence that consumption has started to weaken in April. According to Redbook Research’s latest indicator of national retail sales released Tuesday U.S. chain store sales fell 4.1% – on a seasonally unadjusted basis – in the first three weeks of April compared with the previous month. Also, on a year over year % basis this is the first such drop since March 2003 when worries about the start of the war in Iraq led to a consumption retrenchment. And the previous time when such year over year % measure of retail sales became negative was in November 2001 when the US was in a recession.
Of course a month does not make a trend – even if this is the first outright drop since 2003. But the fundamental factors leading to a consumption slowdown – identified above – are here to stay and get worse. So this is the first signal that after housing, auto, manufacturing, non residential investment, capex investment by firms, and services that have all shown some signs of weakness and growth slowdown in the last few months there is now evidence that even the only factor that prevented Q1 growth from becoming negative – consumption that grew at a 3.8% rate in Q1 – is now showing serious signs of weakness in the first month of Q2.
Although there is considerable debate in the economics literature as to the relationship between home equity borrowings and consumption (time series don’t show much of a link, but home equity withdrawal could be used to pay off credit card debt or fund home improvements, neither of which would be captured as personal consumption expenditures), both common sense and observation says that home equity often goes to personal spending. And Tim Iacona of Seeking Alpha tells us that too is leveling off:
If your mortgage is more than a few years old, it no longer makes sense to refinance the extracted equity back into a new first mortgage for three reasons. First, you’d have to start back at month one on the loan amortization schedule; second, you probably won’t get a lower interest rate; and third, you’ll have more loan fees to pay.
Now, many homeowners who plan to stay put for awhile, especially those who have just completed major improvements on their homes, are getting squeezed every month as they service the home equity debt that seemed like found money just a couple years ago.
This was confirmed earlier today when it was learned that Americans are much less willing to take money out of their homes and spend it now that home prices are falling across the country and interest rates show no signs of coming back down.
This recent story($) in the Wall Street Journal tells how short-term interest rates are cramping the style of former spendthrifts.
A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences. The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody’s Economy.com Inc. Although that decline was partly offset by a pickup in fixed-rate home-equity loans, total home-equity borrowing rose just 9% in the 12 months through March, well below the 21% average annual growth rate of the past five years.
“People are feeling uncertain about the value of their home and are feeling tapped out,” says Doreen Woo Ho, president of Wells Fargo & Co.’s consumer-credit group….
