Clint Burdett Strategic Conslulting
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Consumer Spending and the Business Cycle (updated weekly - my method)

Overall: Real GDP grew in 2018 to 2.9% YoY towards its historical trendline (3.2% average since 1948), but Real Personal Consumption Expenditures (PCE), which is the core contributor of real GDP at 69.1% is trending down. And Private Fixed Investment is trending down, the 2nd driver of economic growth.

My rule of thumb to sustain Real GDP expansion at 3% or greater is that real PCE grows at least at 2.5% YoY (threshold) and increases (momentum) over two consecutive quarters.

Real PCE is a measure of purchases of goods and services by persons adjusted for inflation growth from the same quarter last year, now down from 4.3% Q1 2015 of growth to 2.8% in Q1 2019 (May 2nd estimate). This implies the expansion is losing steam but NOT contracting; modest growth could continue.

Real GDP increased at 3.1% APR in Q119 (2nd est) from Q418 2.2%. from an upturn in state/local government spending, accelerations in private inventory investment and in exports, & a smaller decrease in residential investment, partly offset by decelerations in PCE and nonresidential fixed investment, and less in federal government spending. Imports turned down. (2018 Annual Real GDP growth was 2.9%, in 2017 2.2%.)

Real GDP growth will face these headwinds:

A perception recession is around the corner and several Constant Maturity Treasury (CMT) debt yield curves (3m-1yr, 3m-5yr, 3m-10yr) have inverted, which means Treasury debt investors are paying to park cash in the short term and has sparked fears of a global slowdown.

President Trump's war with the House, trading partners, and long-term policy uncertainties, federal debt increasing, savings rate increasing (families are being more prudent), fall 2018 retail sales growth rate YoY declined. Inventory of new homes for sale is increasing, new starts moderating. Household debt is rising again after Great Recession deleveraging. Durable Goods Inventories are building. Discretionary big ticket sales like RV, new car declining. Business borrowing interest costs increasing.

In 2018 real GDP's YoY growth rate peaked at 2.9% YoY, and likely to decline in 2019. This 100+ month expansion is long in the tooth and in 2019 national politics are having an partisan affect. Now is the time to have a plan for the downturn starting in 2020 to protect your cash and cash flow.


Real PCE Percent Change to Same Period Previous Year
In the following charts, I use real PCE, a solid black line, unless the other data is nominal (not adjusted for inflation) where I use nominal PCE, a dotted black line.


Real PCE is the largest percentage contributor to Real Gross Domestic Product. Other contributors rise and fall from effects of consumer spending.

In a recession, real PCE's percentage of real GDP can increase rapidly as other contributors percentages collapse (a zero sum game), for example Residential Investment's new home construction (data since 1947).

A pattern to look for is the rate of change of real PCE to the same period last year declining, a leading indicator for a recession.

Real PCE divided by Real GDP as a percentage
What Triggers A Recession Econbrowser Recession Index Indicator BEA Gross Domestic Product Current Release


Contributions to percent change in real GDP hint the end of the expansion in the near term. Real PCE's contribution to Real GDP and Residential Fixed Investment are declining.

Contributers to Real GDP
Real GDP Change To Previous Year from 1949 (SAAR)
BEA National Data Contributions to Percent Change Real GDP Last 10 Quarters (SAAR)

GDP estimates

Jim Hamilton's comments on recession likelihood, very low: In April 2019, "the numbers unambiguously tell us that U.S economy keeps growing. Those who for several years have been predicting disaster around the corner will have to wait for at least a few more corners."

Real PCE and Industrial Production Index percent change compared to the same quarter last year. Industrial production (equivalent to about 19.1% of GDP in 2017*) fell off last quarter and remains modest.

Real PCE, Industrial Production Index Since 1947, Percent Change to Same Period Previous Year
*I mostly use BEA GDP data, which is persons spending and income, and does not include manufacturing spending.
Here I use CIA Factbook ratios for contributions to GDP by industry, equivalent to BEA percentages.
.


New Durable Goods Orders (9% of GDP within Industrial Production), current rate of growth is declining late in 2018 into Q2 2019. Some digressionary purchases like autos/light trucks are declining compared to the same period last year.

Durable Goods Orders
Quarterly to smooth data - Durable Goods Quarterly Chinn Dec 18 observation on RV Sales Declining
Light Weight Vehicle Sales: Autos and Light Trucks   ISM® Latest  Fed G17 Current


The Durable Goods Orders to Inventories pattern, another view, shows the build up and sell off of inventories.
Note durable goods sell less often, inventory builds when spending slows. Inventory sell offs can be triggered by higher interest rates carrying costs or when interest on parked cash receives more interest than investment in inventories, which can lead to or be coincident with the beginning of a recession. New orders are declining as inventories hold steady.

Durable Goods Orders to Inventories Percentage Change from Last Year,
Change in Private Inventories Billions of Dollars to a Year Ago


Investment <top>

Overall, total private fixed investment (about 18% of GDP) is growing faster than residential investment in new homes and apartments, and


Gross Private Domestic Investment growth (in Q1 a 7.4% change from same Quarter last eat SAAR) is growing faster than Real GDP growth (in Q1 a 5% change to same quarter last year SAAR), a positive sign.

Gross Domestic Product and Included  Investment CompoContribution
More detail on Construction Spending


Gross Government Investment has been volatile since the Great Recession and trending down since WWII, a structural problem where Government Investment per capita has declined dramatically.

I observe that the Great Recession Recovery has had two phases: until February 2014 stabilization - austerity with very modest growth and thereafter growth similar to a normal expansion. Therefore we are about 64 months into the second phase (the average normal expansion last 65 months). Governments sending are increasing.

Gross Government Investment and Real PCE Percent Change to Same Period Last Year


Debt <top>

How much cash can a person, families, businesses, and governments access in a downturn? Less. As Federal debt is growing, accelerating, personal debt has bottomed building again; credit card debt is growing; families mortgage debt is growing but foreclosures are very low and Baa business borrowing costs are increasing, delinquencies not yet.


GDP, PCE, Federal Debt and Interest on the Debt Per Capita. Federal debt interest payment percentage of principle have been low but starting to rise.

Kenneth Rogoff in November 2018 warns:

"For the moment, the US can finance its trillion-dollar deficits at relatively low cost. But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas." (See Risk discussion below)

GDP, PCE and Federal Debt per capita
For more detail see Federal Debt Percentage of GDP


Nonfinancial Corporate Debt - The rate of change from same period last year is decreasing, businesses are borrowing less.

Nonfinancial Corporate Debt and Percent Change from Last Year - Quarterly,
FRED source: Nonfinancial Corporate Debt and Percent Change from Last Year - Quarterly

 


Nonfinancial Corporate Debt as a Percentage of GDP (NSA) has peaked and is trending down.


Nonfinancial Corporate Debt as a Percentage of GDP (NSA) - Quarterly,
FRED source: Nonfinancial Corporate Debt as a Percentage of GDP (NSA) - Quarterly

Rosenberg in Forbes is concerned refinancing at higher rates will increase commercial delinquencies in 2019 and 2020.

Baa Corporate Rates (Monthly) and Delinquency Rates (Quarterly). As Baa interest rates rise, delinquencies (lagging) have not increased much.


Moody’s, Moody's Seasoned Aaa Corporate Bond Yield [Baa], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/AAA, April 9, 2019 and Deliquency Rates for Industrial/Commercial Loans.,
FRED sources: Moody's Seasoned Baa Corporate Bond Yield [Baa], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/Baa, and Delinquency Rates for Industrial/Commercial Loans.

 

Household Debt in dollars per capita is increasing.

Revolving, Nonrevoling, Mortgage Debt Per Capita


Household Debt Service Payments as a Percent of Disposable Personal Income is the lowest in decades. After the Great Recession, households have paid down debts.

Real Disposable Income per capita
Net worth to Disposable Income ratio


Household Debt Service Ratio (blue line) steady since 2014 as the population grows, mortgage debt falling offset by rising more expensive credit card debt. Overall household cash flow has improved significantly since the Great Recession.

Household Debt Service Ratio and Homeowner Financial Obligation Ratios
BEA: Disposable income is the total after-tax income received by persons; it is the income available to persons for spending or saving


Credit Card and Business Loan delinquency rates are ticking up. Mortgage delinquencies increase and accelerate entering a recession, not an issue now, very low.

Delinquency Rates
Delinquency Rate on Single-Family Residential Mortgages YoY Rate of Change
Mortgage Foreclosure Rates from Blackknight


Jobs <top>

The USA is at full employment with the 26-55 cohort participation rate increasing.


Job growth is slowing down, still expanding. Jobs holders are leaving their job for better opportunities. There are more job openings than unemployed.

All Employees:Total Nonfarm And Percentage Change from Same Period Last Year
See Bureau of Labor Statics (BLS) Job Openings and Turnover Survey (JOTS) for fine detail and KC Fed for Labor Market Momentum


Hiring lags Personal Consumption Expenditures (PCE) spending, the PCE growth rate of change is flat.

Real PCE to Civilian Employment Rate of Change to Same Period Last Year


Employment compared to Capacity Utilization, which continues to decline, a structural change. Will tariffs reverse the trend is unknown.
(Presidential terms indicated.)

Percent US Population Employeed Compared to Total Capacity Utilization


Labor Force Participation Rate USA 16 years old or older has declined as baby boomers retire but should rise soon as millennials enter the work force.

Employment-Population Ratio, Participation and Unemployment Rates


Participation Rate 25-54 Year Olds (prime working years cohort) is improving as younger people get jobs.

For Real GDP grow at 3.0% or greater at a Seasonal Adjusted Annual Rate, individuals must continue join the work force. When employment approaches full employment, there are fewer individuals to join the workforce and without wages increases, Real PCE growth declines. We are at full employment.

 

25-54 Years Old Cohort - Percentage Employed of US Population, Participation Rate, Unemployment Rate quarterly


With Manufacturing employees (blue line, little growth) & Service Employees (red line, increasing growth) and Jobs per Capita increasing, which supports Social Security and Medicare taxes, all are increasing since the GenX and Millennials generations larger cohorts are in the work force than the Baby Boomers retire.

Manufacturing and Service Employees
Manufacturing v Service Average Hourly Earnings Percent Change to a Year Ago


Wages <top>

In 2018, wage growth and PCE improved. This sustains the business cycle as we reach full employment.


Increases in PCE lead to more jobs should lead to better wages with a lag.

Average Hourly Earnings, Real PCE,  Total Nonfarm Employeed



The Atl Fed Median Wage Growth Tracker shows wage growth is flat as the labor market tightens. This suggest modest GDP growth late in the expansion.

Atl Fed Wage Growth Tracker


Government action to increase income growth: a mixed bag, with a small bump up compared to the same quarter last year from the 2018 tax cuts.

Nominal PCE compared to Average Hourly Earnings Rate of Change from Same Period Last Year


Funding lifestyle (PCE) from earnings or savings? We have dedicated less to savings to near cash holdings. In the next chart, the savings rate been flat since 2016.

Nominal PCE compared to Average Hourly Earnings Rate of Change from Same Period Last Year

Nominal PCE compared to Average Hourly Earnings Rate of Change from Same Period Last Year


Real Disposable Income per capita continues to grow modestly.

Real Disposable Income per capita


Inflation <top>

Core Inflation, both core CPI and core PCE Index measures near 2% YoY, the Fed target for core PCE. This suggests that low inflation has made GDP growth modest.

CPI comapred to CPI
Summary of core CPI and PCE differences and a wonkish explanation The Great Moderation


Comparing nominal to real PCE, the green line is the PCE deflator, another measure of inflation. Nominal and Real PCE are diverging, therefore the Fed is unlikely to raise the Federal funds rate in 2019.

Nominal PCE test mobile friendly


Core PCE (less food and gasoline) and wage pressures, where pressure to increase wages is evident of late (more volatility).

Comparie PCE Excluding Food and Energy to Average Hourly Earnings  Average of Trailing Three Months Rate of Change

Homes (Private Residential Investment) <top>

New Homes (Private Residential Fixed Investment - the red line - the classical engine of GDP growth) compared to Total Fixed Investment grew late in the Great Recession recovery, is tailing off now but still improving. See Bill Mcbride, Calculated Risk, for more detail.

Total Fixed Investment and Components - Percent of GDP,
Bill McBride, Calculated Risk on Have New Home Sales Peaked?


Home Ownership Rate compared to Rental Property Vacancies move in tandem. Expect home purchases to increase but not approaching the rate before the Great Recession. With the Millennial and GenX generations at the age to purchase a first house, many continue to rent.

Home Ownership Rate compared to Rental Property Vacancies


The Average 30-Year Fixed Rate Mortgage rate has fallen into the spring buying season.

30 Year Average Mortgage Rate


Housing starts, new and existing sales are tailing off in the fall, winter even as mortgage rates moderate, still well below the pre-Great Recession peaks and now picking up early spring.

Home Sales (SAAR)


New Homes Starts, Permits and Months of Supply. With more than 6 months supply of new homes for sale and a plenty in the pipeline and permits approved, inventory could increase into 2019. Increasing home for sale inventory is a leading indicator for a recession.

Privately Owned Housing Permits and Starts (SAAR)


New Home Median Prices are not affected yet by higher tariffs for materials, more by increasing inventory.

Privately Owned Housing Permits and Starts (SAAR)


House Prices Change Relative to Consumer Price Index. House price increases are more reflective of population growth (more buyers) versus less inventory (months of supply).

Housing Bubble Price Divided by CPI


Retail Sales <top>

Improving, more purchases paid with credit card debt. For awhile a good sign for the economy.


Swings in Advance Real Retail and Food Services Sales Month to Month are less volatile, though 2018 fall sales decreased YoY.

Advance Real Retail and Food Services Sales Percentage Change to Previous Month Last Year


The Percentage Change for Retail Sales to Same Month Last Year is trending down.

Advance Real Retail and Food Services Sales Percentage Change to Same Month Last Year


Retail and Food Service Sales ex Gasoline compared to Nominal PCE trending down since the fall.

Retail Sales Ex Gasoline Smoothed


Risk <top>

Yields on Federal securities in the over-the-counter market are converging, which means sellers have a short term viewpoint accepting for a lower price for short term securities, a higher yield for the buyer. Treasury sellers and buyers perceive more risk. This bodes poorly for next year and especially if the 2 Year - 10 Year CMT spread inverts, short term yields are greater than long term yields. The press treats the 2-10 (or 10-2) spread inversion as the tipping point for near term recession.

A proxy for market risk is end of the day the over-the-counter (OTC) Treasury securities yields (at the last bid price for 3 and 12 month Bills, 1 year to 2 year Notes to 30 year Bonds). The New York Federal Reserve calculates the Constant Maturity Treasury (CMT) rates at the end of the trading day. Constant maturity is an adjustment for equivalent maturity made by the Federal Reserve Board to compute an index based on the average yield of various Treasury securities maturing at different periods. These CMT yields are used to compare the spread, the difference in yield for Treasury A to Treasury B.

Read more about yield curves, spreads, and types of risk - I am still learning about the relationships.

The most reported spread in the financial media, 2yr minus 10yr CMT yields, is converging (approaching 0). When 2yr CMT yield is greater than 10yr's, the yield curve has inverted, short term open market interest rates are higher than long term rates. Since WWII a recession will follow in about 11 to 24 months from the date of the inverted 2-10 spread.

 

2 Year minus 10 Year Constant Maturity Treasury Yields compared to Nominal PCE Percentage Change from Previous Year
The financial press often report the 10 - 2 spread, but I do the opposite, 2 - 10, so I can show the spread's relationship to nominal PCE (fixed securities buyers factor in inflation so I use nominal PCE).


Yields for Constant Maturity Treasury 3 Month Bills and 2,5,10 Notes and 30 Year Bonds are converging. The 3m T-bill to 5 Year T-Note and 3m to 10 year spreads have inverted mid-March. In 2006-2007 there was mania risk, in 2010-2015 low market risk and today suggestions of liquidity risk - investors are moving to shorter term Treasury securities to protect cash. Compare 2006-2008 to now in this chart.

Constant Maturity Treasuries Spreads
See larger display of spreads since 2016 US Treasury Source Data

My observations of several CMT yield spreads (more nuanced than a flight to safety, from my consulting years planning strategic use of funds):

On 5/30, the 30 Bond yield is 2.69%, well below its 3.61%% average yield since 2/2006. Purchasing long term Federal Debt is getting more expensive as yields fall. The 5yr Note yield is 2.04%, below its 2.20% average yield since 2/2006. The 30 Year Treasury Bond is a more attractive investment than the 5 Year Note and implies long term investors are NOT moving to shorter term investments or cash.


Overall, the other-the-counter market for Federal securities is anticipating a slow down or recession in the near to mid term and Total Private Investment is growing at a decreasing rate compared to the same period last year. A 2 year minus 10 year CMT spread of greater than -200 basis points (BPs) usually triggers private investment.

2-10 CMT spread to Total Private InvestmentCompared to Same Period Last Year


Cup and Handle

Coffee cup patternAt university, I was taught that bond investors, a conservative lot, anticipate future economic growth peaks or troughs looking for the "coffee cup." In a recession, the Fed "buys" longer term yields down to attract bond issuers, the handle. Emerging from the recession, Real GDP growth peaks as spending accelerates (left side of the cup), settles down (the bottom of the cup) and then peaks again (the right side of the cup) before onset of the next recession. People often say as the right side forms, the economy is "heating up," evidenced by inflation as fixed security yields rise/prices fall. Bond buyers are moving to a "Safe Haven." Often the 3m-5yr CMT inverts on the right side of the cup. Observing for the cup is an assessment technique.

I think we are coming off the peak on the right side of the cup. Unlike most recession onsets, there is little talk of the economy heating up due to inflation.


See other economy trends:

Links <top>


Authored by Clint Burdett Strategic Consulting
A Practical Guide to Strategic Planning
©Arthur Clinton Burdett III- All Rights Reserved

All the data used to produce my graphs for my
observations on the economy are available to the
public from USA Government sources, use of which is
not protected by a copyright.

For St Louis FRED charts, see citation on the charts
or FRED page for the source and any restricted use.

All graphs indicate the data sources.

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