Consumer spending, at least according to this report, is up compared to the recent past but far lower than it should be at this point in the cycle. Peter mentions debt as one factor. The New York Federal Reserve Bank just updated its consumer debt chart, giving us an enlightening breakdown.
Keep in mind also that debt totals don’t capture all the obligations a typical household faces. Vehicle and apartment leases, for example, don’t show up in this chart. But they are nonetheless monthly bills that consumers must pay.
That little omission might be important when (not if) the next recession strikes. This could be soon, if an indicator Michael Lebowitz uncovered proves reliable.
GVA is a measure of economic activity, like GDP, but formulated from the production side of the economy. It measures the dollar value of all goods and services produced less all the costs required to produce those goods or services. For example, if 720Global buys $100 worth of wood, $20 worth of other materials, and employs $30 worth of labor to build a chair, we have produced a good for $150. If that good is sold for $200, 720Global has created $50 of economic value.
Over time, GVA tracks nominal GDP closely, but they can diverge in the short run. That is happening right now. Three of the last four quarters brought Real GDP growth – albeit not much – while RVA was negative. RVA below zero, as plotted above, is closely associated with the onset of recessions.
This measurement technique is a little offbeat, but it is intriguing. Maybe this time is different, but we know from all kinds of other data that a recession should strike soon – by which I mean that one is quite possible in the next 12–18 months.
Federal Follies
Assume for the sake of argument that we find out in early 2018 that the US economy is, in fact, in recession. What will the Fed do?
The bulk of consumer debt (68%) is still in residential mortgages. Balances have climbed in recent years but remain below the 2007 peak. Both auto and, most significantly (and perhaps ominously), student loan balances have grown enough to offset the lower mortgage balances. Total debt is close to where it was at the beginning of the last recession.
Real value added is the inflation-adjusted version of gross value added. Here’s how Michael explains it: