Clint Burdett Strategic Conslulting
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Consumer Spending and the Business Cycle

I have retired so this page is being converted to graphs that either update automatically from ST Louis Fed FRED data or ones I update monthly.
I no longer provide commentary.

You can find superb daily commentary at:

 

Are folks spending or saving waiting for more certainty about the future?

With dramatic Covid-19 layoffs, wage data since Q1 2020 is suspect. Fewer people making more does not a recovery roar.

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



The Three Drivers of Economic Growth

Real PCE is the largest dollar value of Real GDP.

My rule of thumb to sustain Real GDP expansion at 3% or greater for several quarters is that real Personal Consumption Expenditures (Real PCE) have increased at 2.5% (threshold) over two quarters (momentum), compared to the same periods last year.

In this chart, the steeper the rising slope of the Real PCE change predicts how long Real GDP growth will exceed 3%. Another Real PCE pattern to observe is a rapidly declining slope, a cause for a recession if consumers sit on their wallets (Real PCE quarter over quarter rate of change rapidly falls below 2%).

Real PCE Percent Change to Same Period Previous Year 3 MonthMoving Average to Real GDP
*Bear Markets are "called" when there is a 20% or more in aggregate stock value loss for 3 or more months, the dates from MSNBC. A correction is market loss of 10% or greater for a few months.
**The "Austerity Low" describes that Real PCE declined from Q111 to Q114 when conservatives' controlled of Congress implementing a austerity strategy following the Great Recession. The net effect of reduced spending was delayed government investment, hiring and wage increase.

Private Fixed Investment, the second most important dollar value of real GDP growth. Over time, Residential Investment included in Private Fixed Investment has been a core leading indicator of Real GDP growth or decline.

Government Spending is the third most important dollar value of Real GDP growth increased with the stimulus payments and Fed activities, but it is financed by borrowing.

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

In the following charts, Real PCE is a solid black line, and nominal PCE is a dotted black line.



Real PCE <top>

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

Real PCE divided by Real GDP as a percentage
What Triggers A Recession


Typically at the inception of a recession, real PCE's percentage contribution to real GDP can increase rapidly as other contributors percentages retreat (a zero sum game); for example, observe below Real PCE rises as Residential Investment's new home construction falls entering a recession, except entering the Covid Recession were RI increased.

 

The rate of change to Real PCE compared to the previous business cycles continued to show lower peaks compared to the trend line. This suggest the coming recovery will not accelerate GDP growth greater than 3%.

Real PCE Percent Change to Same Period Previous Year
Same chart from St Louis FED FRED - Change in Real PCE to same period last year


With the Covid-19 Shock, the USA's Real GDP swung widely in since Q2 2020.

Contributers to Real GDP
Real GDP Annual Change To Previous Year from 1949 (SAAR) summary
BEA Percent Change From Preceding Period in Components of Real Gross Domestic Product Last 10 Quarters (SAAR) drivers
Real GDP per capita momentum

GDP estimates:


Real PCE and Industrial Production Index percent change compared to the same quarter last year.

Real PCE, Industrial Production Index Since 1947, Percent Change to Same Period Previous Year

More fine grained than by quarter, find the most recent Institute of Supply Management PMI® reports here.


New Durable Goods Orders are the big ticket purchases.

Durable Goods Orders
Quarterly to smooth data - Durable Goods Quarterly   Fed G17 Current

 

Light Weight Vehicle Sales: Autos and Light Trucks show consumer spending patterns.

Light Weight Vehicle Sales: Autos and Light Trucks

 

The Durable Goods Orders to Inventories Pattern

The build up and sell off of inventories.

Durable goods sell less often, inventory builds when consumer spending slows.

If inventories are holding steady after new orders fall off, then buyers are not buying. Inventory sell offs can then be triggered by higher interest rates - carrying costs or when interest on free cash flow is better than new investment in inventories. Sell offs can trigger recession.


Change in Private Inventories Billions of Dollars to a Year Ago Total Inventory to Sales Ratio


Investment <top>

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. The Biden Administration is attempting to reverse this.

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? Are they over-leveraged?


GDP, PCE, Federal Debt and Interest on the Debt Per Capita

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



Nonfinancial Corporate Debt as a Percentage of GDP (NSA)



Baa Corporate Rates (Monthly) and Delinquency Rates (Quarterly).


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


Household Debt in dollars per capita

Revolving, Nonrevoling, Mortgage Debt Per Capita



Household Debt Service Payments as a Percent of Disposable Personal Income

Real Disposable Income per capita
Net worth to Disposable Income ratio


Household Debt Service Ratio (blue line)

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


Watch for delinquency rates ticking up.

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


Jobs <top>

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 growth.

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


Employment compared to Capacity Utilization, which has continued to decline, a troubling structural change.

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 and 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) should improve as Millennials (Gen Y) and Gen Z get jobs.

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

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


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

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


Wages <top>

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

Atl Fed Wage Growth Tracker


Government often acts to increase income growth.

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


Funding lifestyle (PCE) from earnings or saving during uncertainty?

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

Note the leading indicator dropping real PCE, to the lagging indicator increasing rate of change in savings.

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


Real Disposable Income per capita

Real Disposable Income per capita


Inflation <top>

Core Inflation, both core CPI and core PCE Index measures near 2% year over year, the Fed target for core PCE. This suggests that low inflation has made GDP growth modest for 20 years.

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 PCE test mobile friendly


Core PCE (less food and gasoline) and wage pressures

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,
BEA Private Fixed Residential Investment Components History Annual


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 Gen Z generations at the age to purchase a first house, many continue to rent.

Home Ownership Rate compared to Rental Property Vacancies


30-Year Fixed Rate Mortgage rates had been falling this the summer buying season, surged up 2nd week of September. See current rates and history here.

30 Year Average Mortgage Rate


Housing starts usually accelerated with low mortgage rates.

Home Sales (SAAR)


New Homes Starts, Permits and Months of Supply. 6 months supply of new homes for sale indicate a normal market.

Privately Owned Housing Permits and Starts (SAAR)


New Home Median Prices

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>


Advance Real Retail and Food Services Sales

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

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 has spiked up since spring.

Retail Sales Ex Gasoline Smoothed
Advance Retail Sales: Food Services and Drinking Places (leading indicator), Latest Census Bureau Excel


Risk <top>

Yields on Federal securities in the over-the-counter market predict GDP change. When are converging and falling buyers are accepting a higher price for Treasury securities and a lower yield. Treasury buyers perceive more risk. When the yield curve "inverts" and short term yields are higher than long term yields that is a market risk proxy where investors fear business conditions will deteriorate.

What is the big deal; what does this tell us about the overall market?

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 on the yield curve, the difference in yields for Treasury A to Treasury B. These spreads tell us about investor behavior for expensive investments.

An spread inversion is where the short term yield is higher than the long term yield as investors park cash, as the media says "a Flight to Safety." When all CMT yields are falling (see second chart below) with more risk, long term purchases cost more (lower yield). Since US Treasury securities have always returned the face value at maturity, they are the safest investment in uncertain times to park cash short or long term. Long term Treasury paper carry more speculation risk should yields rise during the remaining term and you sell before maturity, yet this is a very rational dynamic, buyers park cash at the lower yield for a longer term safety if they anticipate economic conditions are deteriorating.

Read more about yield curves, spreads, types of risk and inversion.

The most reported CMT spread in the financial media is the 10yr minus 2yr CMT yields. Since WWII a recession will follow in about 11 to 24 months from the date of the inverted 10-2 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
spreads relationship to nominal PCE.

In 2007-2008 there was mania risk (with little notice, loosing access to funds either borrowing with very expensive credit or withdrawing cash from your bank or from investments) and today conditions suggests market risk - investors are moving to more expensive/lower yields, long-term Treasury securities to park cash.

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

 

Private Fixed Investments and the 2-10 Spread

The 2 year minus 10 year CMT spread of dropping through -200 basis points (BPs) usually triggers private investment. Increasing through 0 (an inversion) usually triggers holding off on funding private investment.

In other words, when the Treasury OTC market has 10 Yr Notes yields greater than 2% higher that 2 Year yields, buyers are anticipating a "predictable, stable future," and fix investment builders usually begin projects. Most commercial loans use 10 Yr Note yields as the benchmark for interests rates.

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


Cup and Handle <top>

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.

See other economy trends:

Links to Dig Deeper <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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