Pollack: Three seemingly unrelated stories


& Company


February 12th, 2018

The Monday Morning Quarterback

A quick analysis of important economic data released over the last week

It was a bad week for the stock market. There was a very brief U.S. Government shutdown. (You probably slept through it……literally.) And, it was a slow week for economic data. What caught my eye were three seemingly unrelated stories.

The first story was on last week’s data. It had to do with the savings rate. During the Great Recession and its aftermath, the savings rate climbed. That suggested that, in general, people were not spending as much of their income as they had been. That changed over the past year. The savings rate, as can be seen in the chart at the end of the MMQ, has declined to levels not seen since 2005.

The second had to do with this month’s increase in consumer credit.  As described below, both revolving (mainly credit card debt) and non-revolving (mainly auto and student loan debt) increased faster than incomes.  Like twice as fast.  A rapid increase is normal for late in the cycle.  But, it is not sustainable for very long.

The third story had to do with the compromise that ended the Government shutdown. Early estimates suggest that it will drive the Federal deficit for the current fiscal year to over $1 trillion. A trillion is a 1 followed by 12 zeros. It means that this year alone, the level of federal government debt will grow by 5%. If this continues, the debt, which doubled under Obama, would increase significantly over the next 10 years.

What does all of this mean? Is it a big problem? Should we head for the hills?   Well, not really. It is manageable.   At least right now. Let’s take it piece by piece. As for the savings rate, what that tells us is consumers are now spending such a large part of their incomes that they will have to find another source if they want to spend more than they have been as a percent of their incomes. They could use stock market gains. They could sell other assets. They could borrow. But, it is doubtful that the savings rate can go much lower. It also explains why growth in retail sales has exceeded growth in incomes. That can’t continue without increased use of debt. This is something we observe later in an economic cycle. So, watch income growth and growth in debt closely.

That brings us to consumer credit. Since 2011, revolving credit use has been under control. Credit card debt has just last year exceeded its 2008 peak. It is now starting to grow at more rapid rates. It is currently growing at about twice the rate of income growth. Again, this is not sustainable for very long. Fortunately, the percent of consumer incomes used to pay for previously accumulated debt (called the financial obligations ratio) is still at a level that is way below what is was in the early and mid-2000’s. It is a sign, though, that consumers are spending freely. As for the rapid growth in non-revolving credit (a combination of auto debt and student loan debt), this is a mixed bag. Auto debt is high. But, FICO scores of borrowers seem to be high enough to suggest there is no immediate problem. The issue is that the level of auto and light truck sales seems to be peaking out. So, the comparisons are likely to be tough from here on out. Also, the easy to obtain, ubiquitous nature of student loans, if nothing else, suggests that millennials will be using money that otherwise would have been used to buy cars and houses in the first 5-10 years after graduation to pay down debt instead. This will continue to be a damper on spending.

For the economy, this suggests that growth in consumer incomes is a must to keep this cycle going.  It also suggests that keeping an eye on consumer confidence is critical at this juncture.  The cycle will continue onward.  But, it’s time to be more watchful.

As for the federal deficit and the level of national debt (now 103% of GDP), all I can say is this. At present, financially, the U.S. is the prettiest house on an ugly block. The level of national debt will be a problem. But, NOT NOW. And not in the foreseeable future. That is because there is, at the present time, no potential replacement for the Dollar as the world’s reserve currency. The U.S., despite all of its issues, is still the safest, strongest and largest of all the alternatives. Indeed, there is no real alternative on the horizon. So, yes, someday it will be a major issue. Someday we will have to pay the piper. But, not today.

Any near term issues will be related to the higher cost of interest on the debt. As interest rates increase, there will be pressure on the non-discretionary spending portion of the federal budget. This could squeeze non-discretionary spending or push up the deficit to higher levels than it otherwise would have been.

U.S. Snapshot:

  • The consensus forecast of 2018’s year over year (y/y) percent change in real (inflation adjusted) GDP increased another 0.1 of a percentage point over the past month to 2.8% according to the February survey. The 2018 forecast is up 0.4 of a percentage point since the October 2017 survey. If achieved, 2018 would be the best year since 2015. The forecast for 2019 calls for a year over year growth rate of 2.4% in real GDP.

  • Consumer borrowing increased in December. It was up at a 5.8% annual rate. It was up 5.4% over a year ago. Revolving credit (mainly credit card debt) was up at a 6.0% annual rate. It was up 6.0% over year earlier levels. Non-revolving credit (auto and student loans) were up 5.7% at an annual rate in December and were up 5.1% from year earlier levels.

  • ISM’s non-manufacturing index rose to 59.9 in January. That’s up from 56 in December. A reading above 50 percent indicates that non-manufacturing sector economy is expanding.

  • The trade deficit grew in December to $53.1 billion. That’s 19.1% larger than a year ago. This was due to a 9.5% increase in imports and a 7.3% gain in exports. The trade deficit for goods increased 13.1% from a year earlier to $73.4 billion.

Arizona Snapshot:

  • According to the Cromford Report, active listings in the Greater Phoenix area dropped to 21,000 in January. That’s down from 21,557 in December and 23,684 a year ago.

  • The resale market for single family homes in Greater Phoenix was up 0.7% from a year ago.

  • According to Cromford, the median price of a single family was up to $245,000 in January. That is flat from December, but, up 8.9% from year earlier levels.

About EDPCo

Elliott D. Pollack & Company (EDPCo) offers a broad range of economic and real estate consulting services backed by one of the most comprehensive databases found in the nation. This information makes it possible for the firm to conduct economic forecasting, develop economic impact studies and prepare demographic analyses and forecasts. Econometric modeling and economic development analysis and planning are also part of our capabilities. EDPCo staff includes professionals with backgrounds in economics, urban planning, financial analysis, real estate development and government. These professionals serve a broad client base of both public and private sector entities that range from school districts and utility companies to law firms and real estate developers.  

For more information, contact –

Elliott D. Pollack & company
7505 East Sixth Avenue, Suite 100
Scottsdale, Arizona 85251

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February 2018