Shiny happy headlines abounded this morning on word that August retail sales came in stronger than expected. August's 0.8% increase marked the third straight month of rising consumer spending. The U.S. consumer is alive and well, so they say.
But I'd be careful about equating the strength of consumer spending with that of consumer financial health. The current strong spending appears to be more a result of cheap credit than anything else.
We're all aware of the fact that record-low mortgage rates and rising home values are keeping the consumer flush with cash. According to Freddie Mac(NYSE: FRE), homeowners took out about $50 billion of equity in the first six months of the year through refinancing. Assuming mortgage rates can't go much lower, the refi party may already be over.
In addition to the benefit of cash-out refinancings, the U.S. consumer has been fueling his spending with an ever-increasing balance of debt. Consumer debt is now at or near record levels based on a variety of statistics. A recent article from BusinessWeek includes several illuminating facts on this subject:
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The amount that Americans owe on loans for houses, cars, credit cards, and other purchases adds up to nearly 100% of their annual income after taxes. That's up from 75% in 1992, after the last recession ended.
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Delinquencies on non-mortgage consumer debt reached 1.86% of debts at the end of 2001, up a third from 1.4% a year earlier and the highest in a decade, according to the Consumer Bankers Association.
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The Federal Reserve says that household debt-service payments were more than 14% of disposable income in the first quarter, near the highest level in 22 years.
These are some scary facts considering that the economy hasn't yet shown any strong signs of recovery. Initial jobless claims rose last week to 426,000, the highest level in almost five months, demonstrating that companies are still laying off workers.
So while retail sales may look rosy now, the consumer spending will be much more closely tied to income growth and job security going forward. Don't be surprised if the retail sales news turns negative in the months ahead.
