Where is the US Consumer? A look beyond the headlines
Recent data related to U.S. Consumers has appeared somewhat inconsistent. Consumer Confidence is high, but retail sales are sluggish. With low unemployment and seemingly healthy consumer balance sheets, many are wondering what has happened to US consumers and why retail sales growth is decelerating. A closer review of the data suggests that consumers may in fact be under more pressure than the headlines alone would indicate.
Headline: Expenses vs after tax income near all-time lows?
A commonly cited metric estimated by the Federal Reserve, the Financial Obligations Ratio, appears to show that US consumers are on relatively solid ground, with the percent of after-tax income going to “financial obligations” near historically low levels (Chart 1). The ongoing economic recovery and the extended period of low interest rates have helped to reduce this portion of the financial burden on consumers. The Fed defines these obligations to be:
- Housing expense (mortgage, rent, insurance)
- Debt service (e.g. credit cards, auto loans, student loans)
- Additional items (including property tax and auto lease payments)
However, do you have health insurance, a cellphone, and need to eat?
The Financial Obligations Ratio excludes some very significant items that most people consider necessary in today’s world. Using data from the Bureau of Economic Analysis, Middleton & Company has created our own measure of non-discretionary spending as a percent of after tax income that includes not only housing but also utilities, healthcare, and food at home (i.e., not restaurant spending). This metric produces a very different picture, seen below in Chart 2. As Chart 2 shows, the percent of income being spent on these items is nearing the peak levels of ’09-’10, a much different picture of consumer health than the one implied by the Financial Obligations Ratio.