A Deep Look At Revolving Credit, And What It Means For Consumer Spending

This guest post previously appeared at the author's blog, Macrofugue.

As economists or macro-speculators, we try very hard to find indications of behaviour changes, particularly in the marginal propensity to consume, invest or save.

Consider the y/y %-growth of revolving credit and real retail sales, and then further, the difference between the two:

Examining the contrast between consumer spending & revolving credit growth may provide an early-warning sign that the consumer is tapped-out near the end of the cycle.

It is very clear that end-cycles are punctuated by tapped out consumers both lowering spending & increasing their debt as their incomes fail to compensate for economic conditions.  The difference perhaps may be indication that future marginal propensity to save is imminent.  If saving & investing are delayed consumption, is the consumption on credit delayed marginal propensity to save?

Let's take another view into it.  The S&P 500 juxtaposed against the ratio between real retail sales & revolving credit:

What accounts for the decline in the early 90's that did not lead to a recession? To view this, let's view ratio between real retail sales & revolving credit against wage growth:

It appears that if wage-growth can compensate from other avenues, this is possibly sustainable. In the early 90s, a huge boom in private investment fueled wage-growth despite. It pays to understand all of the components of the system.

However, it certainly seems like this ratio has an edge in predicting the direction of wage-growth, and possibly the broader view into changes in the marginal propensity to consume or save.

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UBS: Here Are The 12 Consumer Companies That Will Dominate The Globe

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Image: Mental_Floss

Analysts are more and more concerned that the U.S. economy will head back into a recession.

If recession is your base case, then consumer non-cyclicals with strong balance sheets stand to benefit — people will still be purchasing Colgate toothpaste and Tide detergent after all.

UBS analysts including Jonathan Leinster, Gustavo Oliveira, David Palmer, and Eva Quiroga have assembled a list of their Most Preferred Staples — all with strong buy ratings.

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Visualizing GDP: The Consumer Is Key -- And Barely Treading Water

  x You have successfully emailed the post. Doug Short is the vice president of research at Advisor Perspectives.

The chart below is my way to visualize real GDP change since 2007.

I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself.

My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column).

Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product.

Here is the previous version of the chart, showing the Q2 Advance Estimate. Personal consumption expenditures (PCE) furnished only 0.07 of last month's 1.29 (rounded to 1.3) GDP estimate.

Over the time frame of this chart, the PCE component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. PCE in the latest update came at 0.30 of the 0.99 real GDP (rounded to 1.0). This is a bit better than the Advance Estimate but clearly in a downtrend from Q4 2010.

I'll update this chart when the third estimate of Q2 GDP is released on September 29th. But the "real" story will be the following month, when we get our first glimpse of Q3 GDP.

Published at Advisor Perspectives.

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