The Federal Reserve Bank announced yesterday that outstanding consumer debt rose by $21.4 billion, well outpacing the consensus forecast (+$11.8 billion) as well as our own (+$7.8 billion).

Detail (for those who want it; those who don’t can skip to the Bottom Line):

Both the revolving and non-revolving components to credit rose in March, though revolving credit outstanding fell in January and February.  Revolving credit is up 1.7% from its low in April last year, which shows signs that the consumer is feeling a bit better about their own financial conditions than they have, and more consistently so.

However, there is a very looming asset bubble – student loans.  The crisis that the recession caused for many families pushed many towards bolstering their education with hopes that it would help them get jobs.  Not a bad thing per-se, but debt loads for many families have increased sharply.  As the chart below shows, although over-the-year gains in this category have eased of late, they are still at near record growth levels and reached nearly 80% in 2010.  President Obama’s administration has tried to target this category of loans to get some ease for students but their efforts have been largely countered by the Republicans.  Despite the uncertainty over the handling of this legislatively, there can be no doubt the debt load created by this for many families will be a headwind to consumption going forward.  The latest data available for FY 2009 from the Department of Education showed that the default rate on student loans is estimated to have risen to 8.8% from 7.0% in FY 2008; of course that rate has likely risen from that through 2010.  It’s possible it eased slightly in 2011.

Bottom Line:

Overall things are trending in a more positive direction for consumer debt.  Nevertheless the question remains whether current job holders will continue spending at current levels, dipping in to savings and taking on more debt, or whether there will be an ebb to this over the summer.  Over the mid-term the bubble in outstanding student loans will curb consumption some.

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The Week Ahead:  Key Indicators Being Released This Week

Consumer Credit (Apr) – The consensus estimate is for a decent gain in April over March’s estimate.  However, consumption has been looking rather weak, particularly for durable goods (which are typically the things that require loans).  School loans likely continued to increase, along with other forms of credit, but we think it may have slowed based on some other consumer data.

International Trade (Mar) – The rise in the dollar, particularly given the uncertainties in Europe, will have likely caused a rise in the trade deficit for March.

Weekly UI Claims – The big drop in claims last week has placed them in line with recent trend.  We, like most of the market, see little to no change for claims this week, which comes on the heels of a disappointing jobs report from last Friday.  This may continue to signal a weak summer for jobs, much like what we’ve seen over the prior 2 years.

Producer Price Index (Apr) – Markets are largely expecting no change; we see a slight rise, but with commodity prices, particularly for oil, seeing only moderate gains and an unseasonably warm April prices overall are likely to be somewhat steady.

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The Bureau of Labor Statistics (BLS) announced today that jobs grew by 115,000 in April.  This was below both the consensus forecast (+162,000) as well as our forecast (+145,000).  The BLS also announced that the unemployment rate took an unexpected drop to 8.1%, down from 8.2%; most forecasts had expected no change.

Detail

This was a disappointing report, and it appears that the jobs market has seemingly entered into a summer fit – again.  For the last two years prior employment gains have slowly tapered off from spring-time highs; the data are seasonally adjusted, however, there seems to be less pull during the summer for job demand currently than perhaps there has been historically.  Nevertheless, job gains have clearly tapered off from January’s gain of 275K in each of the last three months.

On an industry basis, the construction sector lost jobs and, surprisingly, non-durable manufacturing was very weak compared to the job gains in durable manufacturing (for the latter it’s important to note the rise in both fabricated materials manufacturing and machinery, both very dependent on exports).  The transportation sector took a big hit (a loss of 21.4K jobs), primarily from losses in public transit and passenger (ground) transportation.

The retail sector saw a large gain, though most of that was due to a large rise in general merchandise stores.  There was also a big gain in temporary help services; this again is a double-edged sword, however, since it could also indicate hesitancy on the part of employers to hire full time employees.  One other positive note – people went out a lot more in April, with restaurants and bars seeing a jump of nearly 20K jobs.

Bottom Line

The drop in unemployment was an unexpected perk from the report.  Overall though this was a weaker than expected report and perhaps more importantly is showing the potential for a weaker job market going forward for the summer.  With the employed already having trouble keeping their consumption up the economy is even more reliant on job creation to keep us out of trouble.  We need a solid summer to help avoid furthering weakness, but doing so will be difficult with slower economic growth abroad in an economy currently heavily dependent on exports for growth.

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In its release on Tuesday the Institute for Supply Management announced that general business activity within the manufacturing sector improved in April, with the ISM Manufacturing Index coming in at 54.8 versus 53.4 in March.  This was better than the consensus estimate, which expected slowing in April to 54.8, and even bettered our forecast for growth to 53.5.

Detail

This was a great report, with growth in all the right components of the index and declines in all the right parts too (inventories).  This hopefully begins a counter trend to the slowing we saw in February and March.  Of course going forward the recent slowing we’ve seen in automobile sales could have a dampening effect on the manufacturing sector overall in the next few months too, in addition to weaker international demand for U.S. cars, namely Europe.

But to focus first on the positive, new orders rose, which could help ease some burden placed by automobile production.  Also employment grew, which seems to reflect some improvement in durable goods purchases by consumers over February and March so far.

One problem area – our export dependent manufactured goods (fabricated metals and manufacturing machinery) are going to have some choppy waters to navigate given recession for many countries in the EU and the UK and slowing in China’s economy.

Bottom Line

To reiterate this was a very promising and uplifting report as we head out of what we would hope is now proving to be a short spell of slowing.  Jobs will be critical going forward; although tomorrow’s report may be less than stellar, the May data will be absolutely critical to see if we avoid further slowing in the summer.

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According to data released Tuesday from MotorIntelligence domestic automobile sales slipped slightly in April to an annual rate of about 5 million units, down from the March estimate of 5.1 million units.  Moreover this was in contradiction with the expected increase markets were looking for, though in line with our forecast of 5 million units.

Detail

The loss in sales of domestic automobile sales was more than offset by a rise in sales of domestic trucks, however, making total domestic sales rise in April.  Also, sales of imported cars, though not contributing to our GDP, remained unchanged in April.

Nevertheless total sales of both domestic and foreign cars and trucks fell slightly to an annual pace of 14.4 million units; so far this year the average pace is about 14.5 million units.  This makes things look like a brief stall has entered in to the automobile market, an event not too surprising and in part reflective of the report last week that personal consumption of durable goods fell in March and which looks as though may have continued in to April.

Bottom Line

Our best hope right now is that jobs return; current job holders are obviously having a bit of a rough time keeping their demand pace up.  While the lull in automobile sales is not expected to last too long it certainly won’t help many businesses, including the auto industry directly.

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The Bureau of Economic Analysis announced yesterday that real personal consumption (personal consumption on all goods and services in the U.S. economy, accounting for price changes) rose 0.1% in March.  Nominal personal consumption (consumption not accounting for price changes) rose 0.3%.  The latter is mentioned simply because that is what markets forecast (despite real spending being the more important number).

Detail

The nominal change in consumption was below market expectations of a rise of 0.5%, but in line with our forecast of a gain of 0.4%.  The bigger news, however, was that real incomes, which had fallen three times since November, rose 0.2% in March.  This is a critical factor – real wages desperately need to rise in order to keep pace with consumption.  Since May 2010 real personal consumption has risen 4.1%, while real wages have risen just 1.8%.  As a result the savings rate now sits at 3.8%, a rate we have to go back to early 2008 to witness again and has fallen from a recent high of 5.8% in, not surprisingly, June 2010.

The question again becomes can consumption then keep its recent pace?  Signs of cracking seem to be showing; the March data also showed that personal consumption on durable goods fell in March, it’s first falter since August 2011, which marked the end of a terrible summer for spending on durable goods products.  Spending on services also declined, which meant spending on non-durable goods was the only sector to show growth.

Bottom Line

This was not as good a report as many may think.  Luckily, with gas prices looking moderate for the summer, wages won’t be too heavily impacted.  However, should prices rise unexpectedly high, and should the recession through much of Europe create excess stress on financial markets, this summer could turn out much weaker than anticipated.  Jobs and rising wages will be critical in the short run for business revenue and corporate profits (not just cash) to push the economy forward.  The next part of this tale will be told (in part anyway) on Friday.

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The Week Ahead: Key Indicators Being Released This Week:

Personal Spending (Mar) – Of course a key barometer of where consumption is as the driving force now in the economy and business revenues.  Most everyone is expecting a slowing from last month, but if so it is more likely to be on recent trend rather than a significant slowing economy wide.

Automobile Sales (Apr) – Again, a key barometer of consumer behavior, auto sales (domestic) are expected to have risen by most of the market for April.  We see things as about flat.

ISM Manufacturing Survey (May) – Most in the market expect manufacturing to have slowed, particularly given recent regional reports which nearly all showed slowing, some significant slowing.  Industry production nationally has been lackluster as well.  We see a small rise, but essentially flat overall.

Employment (Apr) – A key indicator of where the economy is headed, most everyone is expecting a slight gain over March, which was dominated by a drop in jobs with department stores, an event not likely to be repeated.  We are slightly less optimistic than the overall consensus, however, this forecast is still above recent trend.

Unemployment (Apr) – We agree with the market consensus that the unemployment rate will remain unchanged in April.

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In its release earlier this week the Federal Reserve Bank announced that Industrial Production in the U.S. was flat for the second consecutive month in March.  This was well below the markets and our expectations of a slight rise of 0.2%.

Detail

The real disconcerting news in this report, however, were the industries which experienced losses in March.  Specifically appliances, clothing, and construction supplies – things directly related to the consumer and industries which performed well below their average monthly gains over the last 4 months.  Overall consumer goods saw a decline of 0.2% in March compared to the average gain of 0.25% over the last 4 months.  This even impacted the sale of consumer automobiles, which also fell in March compared to an average monthly increase of 2.8% over the last 4 months.  Certainly some of this may be drawback due to the unseasonably warm weather we had in the middle of winter; however, this is a big concern should it continue.

The good news was production of transportation equipment, including for business purchase, grew overall in March, as did computer production.  That is business spending seems to have ended on a good note for the first quarter.

Bottom Line

Overall this was a disappointing report with some concerning warning signs in the details.  One month though does not make a trend; we need to see the April data before any sirens go off, but this is something to pay attention to.

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In their March release the Census Bureau announced that retail and food sales grew by 0.8% for the month, well ahead of the market consensus forecast (+0.3%) as well as our forecast (+0.3% as well).  The retail only component also grew 0.8%.

Detail

This was a very positive report, with just two of the major retail sectors reviewed in the report showing over-the-month losses for March (Health and Personal Care stores and Miscellaneous Retailers), an improvement over the (revised) February data when just 4 sectors had over-the-month losses.  Sales for Electronics and Appliance stores grew just over 1% in March, another good sign for a recently fledgling sector (sales are still down over 3% over-the-year).  Unseasonably warm weather has helped contribute to rather strong sales for Sports and Hobby stores as well as Building Materials & Garden Equipment stores.

Bottom Line

The slowdown in retail-only sales over-the-year in the second half of 2011 seems to have reversed course.  We saw a subsequent slowdown in job gains within the retail sector (click on chart below), and though job gains have continued to ebb slightly through March we hope the improvements in sales are robust enough to substantiate future job growth within the sector.

For more industry detail click here.

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The Week Ahead: Key Indicators Being Released This Week

Retail and Food Sales (Mar) – This was released this morning and beat expectations; we’ll have a review later, particularly as it relates to any changes in consumer behavior.

Industrial Production (Mar) – We are in agreement with a somewhat lackluster growth rate for March, which would not be terrific news following no change for February.  The warmer-than-normal temperatures last month will be a boost to construction but a bust for utilities; further, regional reports were quite mixed.  This will be a key barometer of whether personal consumption is keeping pace or waning.

Weekly Initial UI Claims – We expect there to be a slightly more aggressive return to recent trend, though the last few weeks have been a bit unnerving, in particular the 13K rise last week.  Any new change in trend would certainly have implications for job growth and thereby directly overall economic growth.

Existing Home Sales (Mar) – As with the market consensus we don’t expect there to be any real change here.  However, any significant change in the economy’s trend could be predicated by or coincide with a housing recovery, so this will be a big indicator to follow in the coming months.

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