SHI 11/15/17: Steaks on Plastic

No matter how we measure it, household income growth has been tepid.  

The BEA, in their latest economic release entitled “Personal Income and Outlays,” suggests ‘personal income’ (the measure of an individual’s income from all sources:  wages, investments, etc.) grew by 0.4% in September.  But over the last 8 months, personal income has grown has been even more anemic:  an average of only .26% per month. 

The NY FED, in a “Household Debt and Credit Report” for Q3, 2017, paints a different picture on consumer debt growth.  The report begins:

“Aggregate household debt balances increased in the third quarter of 2017, for the 13^th consecutive quarter, and are now $280 billion higher than the previous (2008, Q3) peak of $12.68 trillion. As of September 30, 2017, total household indebtedness was $12.96 trillion, a $116 billion (0.9%) increase from the second quarter of 2017. Overall household debt is now 16.2% above the 2013Q2 trough.”

Are consumer debt loads are growing to quickly?  Has a good chunk of consumer spending has been  financed with credit cards.   Is this true?   And if yes, should we be worried?

If you are new to my blog, or you need a refresher on the SHI, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   This has been the case for decades … and will continue to be true for years to come.

Is the US economy expanding or contracting?

According to the IMF, the world’s annual GDP is almost $80 trillion today.

At last count, US ‘current dollar’ GDP is almost $19.5 trillion — about 25% of  the global total.    Other than China — a distant second at around $11 trillion — no other country is close.

The objective of the SHI is simple: To help us predict US GDP movement ahead of official economic releases — important since BEA data is outdated the day they release it.

‘Personal consumption expenditures,’ or PCE, is the single largest component of US GDP — is typically about 2/3 of the total.  In fact, the majority of all US GDP increases (or declines) usually result from (increases or decreases in) consumer spending.  Thus, this is clearly an important metric to track.   The Steak House Index focuses right here … on the “consumer spending” metric.

I intend the SHI is to be predictive, anticipating where the economy is going – not where it’s been. Thereby giving us the ability to take action early.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI, but we’ll explore related items of economic importance.

If the SHI index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:

Moody’s Analytics, in a recent Capital Markets Research paper posted this graph which I’ve modified slightly with the two vertical red lines:

Here’s what’s interesting about this graph.  First, note it begins in 1964 — about 60 years ago. And, yes, without doubt, “US Nonfinancial Sector Debt” — another name for consumer debt — has increased meaningfully over the 50 years thru 2009.

But not since then.  In fact, in the last 8 or 9 years, growth in consumer credit has been relatively tame.  Take a look at this graphic, courtesy of the FEDs ‘Z.1:  Financial Accounts of the United States’ report:

Look at the “Households” column.  Consumer debt growth really didn’t take off until 2016…and even then, not at an alarming rate.   What REALLY took off is the growth in US household net worth.  Look at the second column — US household net worth has increased almost 50% since 2007!

Consumer credit ended 2015 at $3.417 trillion; at the end of Q2, 2017, 3.697 trillion.  Even if you’re a bit alarmed at a 3-4% household debt growth rate, take solace in this fact:  All debt is cheaper today, making the burden easier for consumers to shoulder.  Finally, consider the concept of “loan to value” — or the relationship between consumer debt and household net worth.  In Q3 of 2008 — the date of the prior debt balance peak — household net worth was about $56 trillion (see the chart above), meaning the “debt-to-total equity” ratio was 22.3%.  Right now, with household net worth over $96 trillion, our “debt-to-total equity” ratio is down to 13.4%.

Here’s a great chart, courtesy of the NY FED, comparing total consumer debt balances at the prior peak to current levels.  Notice that while ‘non-housing’ debt has increased, over the past 9 years housing debt has declined by $800 billion!

As the US homeownership rate has declined since 2008, you may be thinking that could account for the large decline in housing debt.   But on the flip-side of that coin, the value of residential real estate has increased $18.1 in Q3, 2008 to $23.8 trillion today.  Thus, while fewer folks own homes today, the homes they own are more expensive … and their debt balances are lower.

So fear not!  Unlike the consumer debt explosion from 2000 to 2009, consumer debt growth is not worrisome at all … and the interest cost to service all consumer debt is actually quite a bit lower.  Take the plunge:   Put your steaks on plastic!  And don’t forget the lobster mac & cheese!  🙂

Speaking of Mastros, how are reservations this week?   Pretty good, it turns out.   Last year, at this time, 8:45 was available … but not today.  Today, they’re fully booked until the 9:00 pm time slot.

While this week’s SHI is a bit weaker than last year, the delta is not that large.  The long term trend, while a bit more sluggish that last year, remains fairly consistent.  Take a look:

I’ve had a good response to my question:  “Should we expand our data set.”   The overwhelming response:  Yes!   So that’s what we’ll do.  Using the same methodology, but in ten (10) cities around the US, we will expand the SHI next month.   Thanks for sticking with us.

• Terry Liebman