August 2010 Personal Income and Outlays, Retail Sales and Consumer Debt: The Myth of The Deleveraging Consumer

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Bureau of Economic Analysis data revealed that growth in disposable personal income (DPI) outpaced personal consumption expenditures (PCE) in August. DPI increased by $52.0 billion (0.5 percent) while PCE rose by $41.3 billion (0.4 percent) relative to July. The advance in DPI was the largest so far this year, but it was largely propelled by a resumption of extended and emergency unemployment benefits rather than improved private sector hiring.

"[Consumers] are not retrenching, but neither are they splurging," observed Sal Guatieri, a senior economist at BMO Capital Markets Inc. in Toronto. “The recovery is on track, but remains lackluster."
 

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Retail-sale activity paralleled PCE in August, rising 0.4 percent compared to July as back-to-school discounts and tax holidays lured consumers to stores. "The tax-free holidays really gave a boost," said Ken Perkins, president of Retail Metrics. "Retailers came out of the gates strong on the promotional front in the last week of July and that carried through for basically the entire month of August."

Same-store sales, considered a key indicator of retailers’ health because they exclude results from new and closed locations, rose 3.5 percent. As we have argued in the past, however, this metric can provide deceptively strong signals because closed stores concentrate customers into the fewer remaining locations, thereby boosting their sales figures.

Another noteworthy item is that the annual percentage growth in retail sales has slowed dramatically from the heady pace seen in April. This development bears watching.
 

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Total consumer debt outstanding declined in August as the retreat in credit-card purchases more than offset a small rise in non-revolving debt. Total credit decreased 1.75 percent (SAAR); revolving credit fell by 7.25 percent while non-revolving credit increased by 1.25 percent.

A recent Wall Street Journal article questioned the assumption that consumers have been deleveraging voluntarily as a way of eliminating debt. By looking at the Federal Reserve’s Flow of Funds report, WSJ found consumers have instead been aggressively leveraging more and more until the banks put them into involuntary bankruptcy, cutting off the money spigot.

Of the $600+ billion in deleveraging that has occurred since mid-2008, WSJ found that only about $20 billion was voluntary. Contrary to what has been the “received wisdom,” it appears a large proportion of consumers do not, in fact, moderate their spending while still in possession of credit; on the contrary, they accelerate spending until breaching the lender’s charge-off threshold -- at which point all credit is cut off. “This is a startling realization,” said Tyler Durden, whose blog brought this analysis to our attention. “[It confirms] that the average American is actually ‘hyperleveraging’ to the point where all available credit is forcefully eliminated by a lender institution! The conclusion is that consumers do not pass a moderate ‘Go’ on their way to insolvency, they go from hyperleverage straight into bankruptcy.”