US consumers are making economic doomers look silly

The reality is more nuanced and reflects how consumer spending habits have shifted.

After being so consistently wrong in recent years about how the US economy and households would perform coming out of the pandemic, doomsayers should have learned their lesson. But there they were in full force after Pool Corp. said late Monday that it was lowering its earnings outlook because households aren’t installing backyard swimming pools as they once did. Here’s how Pool put it:
“The most recent pool permit data suggests persistently weak demand for new pool construction, and with the peak selling season almost complete, we now believe that new pool construction activity could be down 15% to 20% for the year with remodel activity down as much as 15%.”

This was clearly a shock, as evidenced by Pool’s shares plunging more than 11% at one point Tuesday, the biggest intraday decline since 2020. Not only that, but the shares of Home Depot Inc., Lowe’s Cos. and other building-related stocks dropped in sympathy. As one economist wrote in a note to clients, “Again, this feels much more like a 1.5% type growth rate economy and not 3.0%.”

There’s little doubt consumer spending overall is slowing after the extraordinary surge during the pandemic era. But don’t confuse that with the idea pushed by the economic Cassandras that the consumer is finally cracking under a mountain of credit-card debt, high prices and elevated interest rates. The reality is more nuanced and reflects how consumer spending habits have shifted. Whereas the period of 2020-2022 was largely marked by spending on goods, whether it be backyard pools, appliances, cars or clothes, the period since has been marked by an increasing percentage of dollars spent on services. In other words, the things that make life enjoyable — travel, leisure, dining out and other experiences.

This shift was on full display Tuesday when Carnival Corp. raised its earnings forecast and said record-setting demand for cruises allowed it to raise prices for its packages. The company’s shares rose as much as 9.88% to their highest since early January. Carnival “sees no natural ending point” in demand, company executives said on a conference call with analysts.

Carnival is not the exception. Concert promoter and ticket seller Live Nation Entertainment Inc. was very bullish about the outlook for performances when company executives discussed its earnings results last month. Here’s a sample of their comments based on a transcript of the earnings call:
“So just to make sure we hit hard on the consumer demand, we are seeing no weakness. The things that we look at that give us an indication of how the shows are selling, how the fans are spending when they go to the site, all continue to be very strong. We’re consistently seeing the sell-through of the shows are at or above where they were last year and that the overall grosses for the artists are consistently higher. So, no issues at all on fan demand relative to last summer.”

But what about the widely watched retail sales report put out by the Commerce Department that showed such spending barely rose in May after the prior months were revised lower? The problem with that report is that it leans heavily toward goods, which Arbor Data Science economist Sam Rines pointed out in a report Tuesday now constitute only roughly 33% of consumers’ wallet spending. “That is why looking at the services side of the economy is worthwhile,” he said. Rines noted that air travel is a decent indicator of consumers’ willingness to spend because it tends to be discretionary, whether for business or pleasure. “Thus far in 2024, air travel has boomed with more travelers than any period in the post-Covid period,” he wrote. “If the consumer is truly pinched, air travel is one of the first places to save money.”

The economy isn’t working for everyone, and many Americans feel frustrated by everything from elevated consumer prices to the lack of housing affordability. Yet it’s not a stretch to think that high home prices and rates are actually helping to fuel some of this spending, with consumers deciding to use funds they would normally deploy toward a down payment and a monthly mortgage for other things.

Yet the problem for the doomers is that their bleak outlook stems from a misinterpretation of household financial data. They point to the rapid depletion of what’s known as excess savings and borrowing. Thanks to extremely generous government programs to support the economy through the pandemic, many of which put money directly into the pockets of consumers, excess savings ballooned to $2.1 trillion in August 2021 compared with March 2020. Households then started to draw on those funds until they were fully depleted in March 2024, according to researchers at the Federal Reserve Bank of San Francisco. As those excess savings shrank, Americans increased their borrowing. The Fed puts total outstanding credit-card debt at $1.33 trillion, up from a pandemic-era low of $970 billion in April 2021.

But presenting numbers without broader context is economic malpractice. Although excess savings may have vanished and borrowing is up, the fact is that this comes after an extended period of deleveraging by Americans. In short, household balance sheets arguably have never been better. Not only has household net worth climbed by a jaw-dropping $43.9 trillion since the end of 2019 to a record $160.8 trillion, but net worth as a percentage of disposable income has jumped, to 776.2% from 714.4%, giving households more financial resources to draw on.

And despite all the hand-wringing over borrowing, household debt as a percentage of disposable income has shrunk, falling to 84.9% from 87.5% in mid-2022 (which itself was down from the peak of 117.1% in 2009), according to the Fed.

As for the bite of rising interest rates, household debt service payments amount to 9.80% of disposable income, a bit lower than the 9.97% at the end of 2019 and the high of 13.3% in 2007. And although there is evidence of rising delinquencies and defaults, they are up from historically low levels and remain well within ranges that are typical in a normal economy — and especially one with a tight labor market that has kept the unemployment rate pinned at 4% or a little below for the longest stretch since the 1960s.

If the post-pandemic era has taught us anything, it’s that the old economic textbooks the doomers are relying on are mostly obsolete. There are no chapters in any of them that explain what will happen in an economy that abruptly stops, sheds some 17 million jobs and contracts 31% only to quickly rebound with the help of some $5 trillion of free-money government programs. It sounds almost as far-fetched as declaring in the early days of the pandemic, when the S&P 500 Index cratered 34% in a matter of weeks, that investors would not only be made whole in a few months but would enjoy one of the most powerful bull markets in history. Oh wait, that happened — just as the doomers didn’t predict.

Credit: Bloomberg