Clint Burdett Strategic Conslulting
Spending Investment Debt Jobs Wages Inflation Homes Retail Sales Risk Links Contact

Consumer Spending and the Business Cycle (updated often - a think piece)

Overall: Real GDP growth rose in 2018 towards its historical trendline (3.2% average since 1948), and Real Personal Consumption Expenditures (PCE), which is the core contributor at 69.4% of real GDP is trending down.

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

Real PCE is a measure of purchases of goods and services by persons adjusted for inflation now down from 4.3% Q1 2015 to 2.7% in Q3 2018 growth from the same quarter last year.

Real GDP growth in Q3 was about 3.4% likely from: durable goods manufacturing increasing though at a slower rate of change, new jobs and steady wage growth, household debt service ratio at series low. Consumers were confident in Q3.

Real GDP growth will face these headwinds in 2019: A perception recession is around the corner, President Trump's war with the House, the Fed, trading partners, and long-term policy uncertainty, the Fed had raised the Federal Funds rate, federal debt increasing, savings contributions drawing down (families had not been prudent) and fall 2018 retail sales declined YoY. Inventory of new homes for sale is increasing, sales declining. Household debt is rising again after Great Recession deleveraging. The interest costs of running a family and business are increasing. Inventories are building up some. Discretionary big ticket sales like RV, new car declining. And for families will soon discover the 2018 Tax cut impact on there income taxes and cash flow in 2019. Republican Senate moderates are unlikely to challenge POTUS, increasing uncertainty in financial markets.

I think that 2018's real GDP's YoY growth rate has peaked at about 3% YoY, and will decline in 2019. This 100+ month expansion is long in the tooth and in 2019 Federal politics are having an outsize affect. Now is the time to have a plan for the downturn starting in 6-18 months to protect 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 and BEA Excel file

Contributions to percent change in real GDP hint the end of the expansion. The 2018 Q2 and Q3 PCE gain likely had a boost from the Q1 tax cuts.

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) 9/2018

GDP estimates


Real PCE and Industrial Production Index percent change compared to the same quarter last year. Industrial production (equivalent to about 19% of GDP in 2017*) is increasing as consumer purchases are slowing down.

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 manufacturing equivalent to BEA percentages.

New Durable Goods Orders (9% of GDP), are increasing since a slow down in 2015-16, which implies businesses expect more sales to consumers. However, some digressionary purchases like autos/light trucks are declining.

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 showing the build up and sell off of inventories, using BEA data are declining now at about -0.2% in Q218 GDP. (Note durable goods sell less often, inventory build when spending slows and sell offs triggered by higher interest rates carrying costs can lead to or be coincident with the beginning of a recession.)

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 (18% of GDP) has modest growth compared to less growth for residential investment in new homes and apartments. We are investing less in infrastructure as a percentage of GDP.

Nominal Gross Domestic Product and the included investments compared to GDP growth. Fixed Private Investment growth (1% change YoY) is not in line with nominal GDP growth (3.4% change YoY SAAR), a structural issue for our competitiveness.

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 a about 55 months into the second phase (the average normal expansion last 65 months).

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

Debt <top>

How much cash can a person, families, and governments access in a downturn? Less. As Federal debt is growing, accelerating, personal debt has bottomed building again; credit card debt is growing; and families mortgage debt is growing but foreclosures are very low.

GDP, PCE, Federal Debt and Interest on the Debt Per Capita. Federal debt interest payment percentage of principle 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."

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

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

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

Mortgage and Business Loan delinquency rates are declining except credit cards. 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 slowing.

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

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 Real PCE growth declines. We are at full employment.


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

Labor Force Participation Rate USA 16 years old or older has declined as baby boomers retire.

Employment-Population Ratio, Participation and Unemployment Rates

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.

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 trending up as the labor market tightens.

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? Now we are saving less to near cash holdings.

Nominal PCE compared to Average Hourly Earnings Rate of Change from Same Period Last Year
Another view The Savings Rate from Disposable Personal Income (BEA)

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.

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 will continue to raise the Federal Funds rate until the deflator (green line) trends down to 2%

Nominal PCE test mobile friendly

Core PCE (less food and gasoline) and Wage Pressures, where pressure to increase wages is evident of late.

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 and is tailing off.

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 is rising compared to last year.

30 Year Average Mortgage Rate

Housing starts, new and existing sales are tailing off as mortgage rates rise and still well below the pre-Great Recession peaks.

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 should increase into 2019. This 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 up.

Retail Sales Ex Gasoline Smoothed

Risk <top>

Yields on Federal constant maturity securities are converging, which means investors have a short term viewpoint. This bodes poorly for next year and when the 2 Year - 10 Year CMT spread is positive, short term interest is greater than long term interest, a recession will follow in 18-24 months.

The 2 - 10 Yield Spread is flattening, converging.
(Bond buyers factor in inflation so I used nominal PCE.)

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.

Constant Maturity Treasury 2,5,10 and 30 Year Yields and 2-10 and 5-30 CMT yield spreads, which are flattening is usually a percussor of a recession in 11 to 22 months seen in the previous chart.

Constant Maturity Treasuries Spreads

Here is an example of converging interest rates triggering a recession. Therefore interest spreads, new home sales and inventory are closely watched to anticipate business expansion or retrenchment.

Effect on Fixed Private Investment of 2-10 CMT Spread

Coffee cup patternAt university, I was taught that bond investors, a conservative lot, anticipate future economic peaks or troughs looking for the "coffee cup." In a recession, longer term yields come down to attract buyers. After a 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," growing too fast as short term bond yields rise. Observing for the cup is an assessment technique.

I think we are approaching or coming off the peak on the right side of the cup.

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.

Privacy Policy
| Table of Contents