I am absolutely convinced recent actions such as the SPR announcement have been made in the interest of trying to spark domestic US consumption, and by default headline GDP growth, in what will be the absence of QE. You can forget Bernanke’s maybe, but maybe not comments. At least near term he’d face a never-ending barrage from the Republican crowd as well as catch hell from global corners if he fired up the press again so soon. He’s going to need a big reason that will be a meaningful back off in either the real economy or stock market. Yet at the same time, in terms of timing, unless another QE is launched at least by the fourth quarter of this year, there is no way it could positively impact the economy prior to the election. And isn’t it really all about politics these days anyway? At the tail end of last month I penned a discussion entitled, "How's That Wealth Effect Workin' Out For Ya?", that highlighted the fact that over the entire economic recovery to date the only category of retail sales that has increased as a percentage of total retail sales has been gasoline (excluding non-store retailing that is net driven). It's pretty darn simplistic and at least semi-rational. Get consumer energy prices down and free up household cash flow for discretionary spending, right? Especially since consumers appear to have already delevered their balance sheets as is seen below, no?
Along with the always informative Fed Flow of Funds report that hits the tape each quarter, those merry pranksters at the Fed likewise give us a peek at household debt obligation ratios once every 90 days. Important in trying to get a sense for just how much of household total cash flow (disposable income) is going to service debt obligations. The chart above updates us through the first quarter of this year. The highlight of the current numbers now being that for both renters and homeowners, debt obligation ratios have fallen below the average of experience since 1980. Very good news for households whose balance sheets had been stretched to a generational breaking point in the prior cycle. We saw more than a few analysts highlight the enormity of household deleveraging that has taken place so far when these numbers recently became available. Couple this with the fact that the government is dead set on reducing energy prices near term by really any means possible and we have the makings of a consumer spending revival, do we not?
I’m bringing this up to simply remind you that the above view of life is flawed at present. Moreover, since it is being used as an analytical positive by a good number of folks right now, we simply need to remind ourselves that government transfer payments have added massively to total disposable personal income since the credit crisis began. And this is important why? Because disposable personal income (DPI) is the denominator used in the debt service calculations captured in the chart above. Below I've charted government transfer payments as a percentage of DPI over the past four+ decades. We're currently resting near historic highs. But of course the key is to realize what has happened with government transfer payments since the homeowner financial obligations ratio peaked in the middle of 2007. This period is captured in the portion of the chart shaded by the red bar. Government transfer payments as a percentage of DPI have jumped from 16.2% in the middle of 2007 to just under 20% today. In nominal dollar terms, since mid-2007, transfer payments have grown by approximately 0 billion. In case anyone cares to count, that equates to about 4.3% of current period GDP. It easily equates to over 1% of GDP annually since mid-2007.
Over this exact same mid-2007 period to present, total household interest expense has dropped all of $84.7 billion in nominal terms. Now, $84.7 billion happens to represent roughly 0.7% of nominal disposable personal income. Yet in the chart of debt service we see homeowner debt service payments as a percentage of DPI dropping from 17.6% to 14.8%, or a drop of 2.8% of total DPI. And yet interest payments only dropped 0.7% of DPI. So what gives here? Indeed, the Federal Government gives. And has given and given throughout the current cycle. This data from the Fed regarding debt service as a percentage of DPI with no adjustments for the impact of unprecedented Government transfer payments in the current cycle gives a very misleading impression of the character of household balance sheet deleveraging. Very misleading. Again, the world is not about to come to an end. But it's also very true households have quite the distance between now and a satisfactory level of balance sheet deleveraging.
I’m touching on this to again circle back to the key issue of the moment that is aggregate demand within the domestic economy. Or lack thereof as a more proper characterization. Remember, we're seeing aggregate demand as the key concern of the CFO and small business community right now. The character of the current recovery vis-a-vis real final sales to domestic purchasers completely vindicates this headline concern. If indeed households had truly delevered their balance sheets as per the Fed data seen in the unadjusted homeowner debt obligations ratio, then would it make sense that the Fed focus stimulus efforts on consumer borrowing rates as opposed to having the Government take the relatively reckless action of dipping into the SPR? You bet it would. Point blank, aggregate demand is fading because households have not fully delevered their balance sheets and the ammunition to fund deleveraging remains anemic at best. Standing directly in the way of this needed reconciliatory process is the lack of job and wage growth. Until domestic job and wage growth returns, domestic aggregate demand will remain very weak relative to historical precedent. Given that increased fiscal policy is going to be near impossible politically, that only leaves one entity to fill the gap in all of this - the Fed. You think you've heard the last of them in terms of monetary action? The numbers tell us you better think again.
