The American consumer is the engine of U.S. economic growth.
Personal consumption expenditure makes up nearly 70 percent of gross domestic product (GDP). That’s up from around 60 percent in 1980.
So it’s only fair to ask – how is the U.S. consumer doing?
Let’s take a look at wages first.
Wages rising… at a crawl
As the chart below shows, it’s been a long, slow grind to get annual hourly earnings growth back to the levels we saw before the global financial crisis (GFC).
Even now, against the backdrop of just 4.1 percent unemployment, annual wage increases are running at around 2.5 percent, versus 3 to 3.5 percent pre-GFC.
Consumption has to be funded with money from somewhere. It can be through salary, debt, or your savings.
Looking at the salary part of the equation, unless we see wage inflation growing, it’s hard to see incomes driving increasing consumption going forwards.
What about debt?
In the leadup to the GFC, U.S. consumers had accumulated US$12.7 trillion dollars’ worth of household debt – a 68 percent increase over the preceding five years.
As the chart below shows, the majority of that growth was through mortgage debt… not surprising, given the subprime lending bubble was a major culprit in the GFC.
We didn’t see much in the way of auto, credit card or student loan debt growth at the time.
Post-GFC, the consumer deleveraged – that is, got rid of debt. (The Federal Reserve did the opposite.) And by mid-2013, household debt had receded to $11.2 trillion. From the household mortgage debt side, saw a reduction and then a gradual increase since mid-2013…
But take a look at the other components of household debt, in particular student loans. Since mid-2010, Student debt has increased from $700 billion to $1.2 trillion… that’s a 72 percent increase.
Auto loans on the other hand, have gone from $760 billion to $1.4 trillion… a 78 percent increase.
