What to Expect at Stock Market Top—a Drop in Consumer Spending

(Updated 05/01/2018)

Major automakers on Tuesday posted lower new vehicle sales in April as consumer demand continued to weaken following a lengthy boom for the industry.^[7]

Consumer spending accounts for about 70% of gross-domestic-product growth.  When real income increases,  the consumer spend more.  When interest rates increase, the consumer spend less—because it costs the consumer more to borrow, so they step back from buying.

If consumer spending in the U.S. economy starts to struggle, it will start to show up in the corporate earnings of companies on key stock indices that are currently able to buy back their own shares and cut expenses to make their numbers appear better. 

At the market top, we need to monitor consumer spending closely.  When consumers are cutting back on discretionary purchases to preserve other spending, a market top could be forming and a recession could be imminent.

Personal Savings

Today, personal saving in the U.S. is sliding faster than at any time during the last 42 years, even plummeting below the previous record lows from 2000 and 2006.

Non-Home Wealth

When savings drop, people consume more than they earn. If this happens over a period of time, people not only consume wealth, but simultaneously eat away at the rainy day cushion.

In the current recovery cycle, we have seen a steady rise in the proportion of U.S. households with no wealth.  Based on the latest data, it shows that more than 30 percent of all U.S. households have zero or negative non-housing wealth.^[4]

Credit Card Delinquency Rate

If you don't have either income or savings, borrowing is the only option left for marginal spending. People get hooked on debt when rates are low. But when rates rise as it happens now– it becomes too much to manage and it shows up in the statistics. 

In Q4 2017, we have seen that delinquencies on US credit cards have surged and eclipsed the ’07 Lehman Moment’.^[3]

Subprime Auto-Loan Delinquency Rate

Not all subprime loans are cut from the same cloth. The 90+ day delinquency rate for subprime auto loans originated by banks dropped after the Financial Crisis and has since remained fairly steady.

In contrast, the 90+ day delinquency rate for loans originated by auto finance companies has been soaring since 2013. In Q3 2017, it hit 9.7%. This 9.7% is the highest delinquency rate since Q1 of 2010. And, it first hit that rate on the way up during the Great Recession in Q3 2008, during the Lehman Moment. A year later, it peaked at 10.9%.^[6]

References

1. The eroding purchasing power of the dollar and its implications for consumption
2. Smaller Subprime Auto Lenders Are Starting to Fold
3. The Myth Of 'The Pin' That Pricked The Bubble; 'The Pin' Is Here
4. The Great Recovery With No Savings: U.S. Households Meet 'Exceptionalism'
5. The 'CAPE To Saving Rate' Ratio Signals A Terrible 2018 For U.S. Stocks
6. Auto-Loan Subprime Blows Up Lehman-Moment-Like
7. U.S. April auto sales show lackluster start to spring
8. Consumers Skip More High-Rate Auto Payments Than During Crisis