The US economy lies somewhere between boom and bust as shown by the following graphical representation of real GDP growth. Nevertheless, there are aspects of US economic growth that have boom type characteristics/risks; these are found primarily in the significant increases in auto focussed consumer credit and automotive production/capacity
Short term data has varied wildly of late; such can often obscure the underlying trend: what if we adjust for inventories and changes in consumer credit? Well we see less noise for one, but we also see a slower underlying growth profile – yes, credit creation is part and parcel of growing expenditure but I still feel we are in a high debt/deleveraging and weak income growth dynamic that needs to be especially sensitive to growth in credit/debt.
What about the longer term frame?
Nominal changes in personal consumption expenditures (PCE) have remained range bound since the late 1990s.
And the real picture is even clearer.
Adjusting for population growth, real per capita PCE fundamentals are even weaker: we have an economy that is growing but is not able to provide material increases in consumption expenditure…this has implications for asset prices!
So what is significant from the current data?
Durable goods, especially motor vehicles and parts, consumer credit and more recently new orders for aircraft. Is it possible that auto loans and MVP production are skewing economic growth perceptions? It is likely that it is impacting equipment investment!
We have seen a big increase in durable goods consumption in the second quarter..
Led by motor vehicles and parts and recreational goods and vehicles.
Equipment investment expenditure is showing a rising trend since Q3 2012: the blue line shows the rolling average change in equipment expenditure over trailing 4 quarters.
But annual growth rates are still short of startling on an historical basis.
It is possible that the current CAPEX increase has it roots in the surge in motor vehicle and parts production. The consumer credit underpinning would however suggest caution:
There are concerns over lengthening borrowing terms, increasing amounts loaned to sub prime borrowers and excess capacity in the auto sector that could expose a key driver of growth.
But non revolving loan growth is outpacing income growth:
As for service expenditure, this is becoming increasingly volatile of late:
Residential construction investment growth has also eased off:
Exports and imports bounced back in Q2..
But you have to question the role of the auto industry….
A factor which is also impacted imports….
And inventories economy wide remain historically high:
Interestingly recent revisions show not only that Q1 2014 growth was revised to a lower loss but cumulative growth to Q4 2013 had also been revised down…
But, my guess is that the weakness in income growth of the past few years will continue to impact even as income growth appears to be rising..
The US is still too dependent on transfer receipts..
And average hourly earnings’ growth has barely budged…..
And despite an earlier burst in income growth…
recent data, and particularly the real per capita trend looks to have weakened…
Savings also look to be on the up…
And limits on Personal Consumption expenditure expansion look to be well defined…
A recent Federal Reserve research document on growth of income and its distribution paint a weaker picture than even the headline national income figures….
But, seriously what is happening to motor vehicles and parts production and new orders…?
Excluding the recent burst in consumer credit growth and in the absence of substantial and sustained real wage growth, can we really rely on the this short term burst in activity in this sector?
Other data is also adding to the recent positive economic spin…note transportation orders and in particular aerospace…
But consumer goods orders are on a different plane…
Yes, bank loans are also increasing…
And so is broad money supply growth…
But lending growth, outside of consumer education and auto loans, seems to be concentrated in commercial real estate and commercial and industrial loans:
In summary, the US economy remains within a low GDP growth dynamic constrained by low income growth and high personal consumption expenditures. You only need look at the Personal Consumption Expenditures the economy has been able to produce since the late 1990s to realise the growth dynamic has substantial structural issues.
A burst of economic activity is noted in automotive vehicles and parts, a large part of which looks to be financed via consumer credit and a weakening in lending standards and a lengthening of terms. Consumer debt remains at relatively high levels and despite high interest rates, debt levels when set against weak income growth remain high.
The above chart adjusts debt service ratios for income growth and the post crisis rise in current transfer receipts. It is also worth noting that low savings rates also bound debt service ratio dynamics.
And finally the above chart shows that the peak in debt to GDP for consumers was different from the peak in its accumulation. This strongly suggests to me that even with substantial deleveraging that consumer debt is still in unstable territory with respect to consumers ability to either bear or to absorb additional debt.