It may be a cliché, but there’s a lot of truth in the saying, “Don’t bet against the US consumer.” The latest evidence came Tuesday when retail sales among a control group that is used to calculate gross domestic product exceeded forecasts for the fourth straight month. This time they rose 0.7% for April as measured by the Commerce Department, topping the 0.4% median estimate of economists.
When it comes to predicting the spending habits of Americans, economists are looking clueless. Despite elevated levels of inflation and interest rates, consumers are hardly cracking as many have predicted. Instead, they are helping to increase the odds that the Federal Reserve can bring the economy in for a mythical “soft landing,” avoiding a deep recession that throws millions out of work and does lasting damage.
As for why economists keep getting it wrong, it’s largely because they are still applying rules from the pre-pandemic playbook that are no longer relevant. There are no textbooks that explain what will happen in an economy that stopped abruptly, shed some 17 million jobs and contracted 31% only to quickly rebound with the help of some $5 trillion of free-money government programs. Those repercussions lasted throughout 2022 and are arguably still being felt.
One thing we are learning now is just how fiscally responsible consumers became during the pandemic era. The Federal Reserve Bank of New York released data on Monday that showed total consumer debt fell to 64% of gross domestic product from 85% in the first quarter of 2008, according to Bleakley Financial Group LLC Chief Investment Officer Peter Boockvar. Data compiled by Bloomberg puts it at about 74% at the end of 2019. This sort of flies in the face of the narrative that Americans have loaded up on debt over the last year or two to make ends meet. On the contrary, it shows that they are in strong shape financially to weather this current bout of faster inflation — which is decelerating and may yet prove transitory — and higher borrowing costs.
But what about Home Depot Inc., which said on Tuesday that it was cutting its outlook for the year after first-quarter sales dropped more than expected? Isn’t that a sign of consumer weakness? Perhaps not. Home Depot tends to benefit when home sales are soaring. But residential transactions have cratered, in part due to near record-low inventories of existing homes available for sale rather than a lack of consumer confidence. The National Association of Realtors puts supply at 2.6 months, half of what it normally has been going back to the start of 2000. The lack of inventory is largely due to homeowners, who were lucky enough to refinance or buy back in 2020 and 2021 when 30-year mortgage rates were around 3%, not wanting to give up those low borrowing costs by selling.
So, the only game in town for many potential buyers is the newly-built part of the market. That may be a big reason why, also on Tuesday, the National Association of Home Builders and Wells Fargo said their joint measure of sentiment among developers for May rose to the highest in 10 months and exceeded the forecasts of economists, who expected no change in sentiment.
The New York Fed’s Liberty Street Economic blog explained in great detail this week how consumers greatly benefitted from those mortgage rates back in 2020 and 2021, and will continue to benefit. The researchers estimated in the blog that between the second quarter of 2020 and the fourth quarter of 2021, some $430 billion in home equity was extracted through mortgage refinancing. Of the 14 million or so mortgages that were refinanced during the period, 64% were deemed “rate refinances,” which they classified as those with a balance increase of less than 5% of the borrowing amount. For rate refinancers, the average monthly payment dropped by $220; for “cash-out” refinancers, the average amount extracted was $82,000, and the average monthly payment increased by just $150.
Another way to look at this is that about five million borrowers extracted a total of $430 billion in home equity via refinancings; and nine million refinanced their loans without taking out any equity, resulting in an aggregate reduction of $24 billion in their annual housing costs. “The improved cash flow generated by the recent refinance boom will potentially provide significant support to future consumption,” the researchers concluded.
How far into the future? A separate paper released by the Federal Reserve Bank of San Francisco estimates that there is still much excess savings in the economy — some $500 billion. These are savings over and above what would be expected in the normal course. “The distribution and allocation of excess savings and wealth across the income distribution suggest that households on average, including those at the lower end of the distribution, continue to have considerably more liquid funds at their disposal compared with the pre-pandemic period,” the paper’s authors concluded. “We expect that these excess savings could continue to support consumer spending at least into the fourth quarter of 2023.”
If there’s been one constant in an economy that has continuously surprised in the last three years, it’s that betting against American consumers has been a losing proposition. Someday it may pay off, but not yet.
Robert Burgess is a Bloomberg Opinion columnist
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