Consumer Spending Gives Some Retailers a Lift, But Risks Abound -- 2nd Update

By Josh Mitchell and Josh Zumbrun Features Dow Jones Newswires

U.S. consumers ramped up spending last month, supported by low unemployment, rising confidence and a sense their personal finances have been repaired a decade after the housing crisis spurred a mission to pare back debt.

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But there is a catch: Households are again running up debt, and they are saving less, which could constrain spending in the future.

Sales at U.S. retailers rose a larger-than-expected 0.6% in July, the biggest monthly gain since December, the Commerce Department said Tuesday. Americans shelled out more for cars, furniture, home-improvement supplies and, more than anything, online goods, including purchases during Amazon.com Inc.'s annual "Prime Day" event. Retail sales in June were also far higher than previously reported.

"You have a good stock market. Employment numbers are good. Wages are outpacing inflation. That's all bringing us consumer-spending numbers that are stronger," said Chris Christopher, executive director of U.S. economics at IHS Markit.

Economists responded to the reports by lifting projections for economic growth in the current quarter. Forecasters said the latest figures suggest the economic-growth rate could reach 3% or more in the quarter, a pace the economy hasn't hit since early 2015 and a pickup from a 2.6% pace in the second quarter.

Reaching 3% growth in the third quarter -- if achieved -- would be a milestone for President Donald Trump's administration, even as there has been a lack of movement in Washington on a tax-overhaul plan and a Republican bid to change the health-insurance system.

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That pace may be unsustainable in the long run, given an aging population and slow workforce-productivity growth.

Stronger consumer spending boosted profits at Home Depot Inc., which said sales in stores open at least a year rose 6.3% in the most recent quarter, led by 6.6% growth in the U.S. Carol Tome, Home Depot's chief financial officer, told analysts that growth stemmed in part from millennials forming families and moving into homes they needed to equip.

She also had an optimistic view on the economic outlook.

"There is no recession in sight," she said in an interview.

Still, it is a mixed landscape for retailers broadly. TJX Cos., parent of the discount retailers T.J. Maxx, Marshalls and HomeGoods, reported sales gains. But shares of Dick's Sporting Goods Inc. and Coach Inc. were hammered when they reported disappointing earnings numbers. Despite an increase in consumer spending, the retail sector itself is being punished by competition from online sales.

The latest positive spending trends carry some risks. A big chunk of spending of late has been covered by debt: Total credit-card balances grew $20 billion in the second quarter to $784 billion, the highest since late 2009, the New York Federal Reserve said in a separate report Tuesday. Overall debt -- including mortgages, auto loans and student loans -- hit a record $12.8 trillion.

Americans have also dramatically reduced their savings over the past year.

The personal-saving rate fell to 3.8% in June, down from a recent peak of 6.3% in October 2015 and not far off from prerecession lows.

The dual trends of lower saving rates and higher debt indicate that animal spirits -- a desire to spend and invest -- are rising among households. That might be getting fueled by higher stock prices. However, it also could mean that gains in U.S. wages aren't keeping up with consumers' needs and desires to spend.

For now, low interest rates are keeping a lid on the amount of money consumers must devote to paying off the debt each month. Debt-service payments account for about 10% of Americans' disposable income, hovering near the lowest levels on record, Federal Reserve data show. Just before the recession, such payments peaked at above 13%. Also, consumer debt, when adjusted for inflation and population size, hasn't reached the balances of 2008 that contributed to the crash.

But unforeseen developments -- such as stock-market declines or a quicker-than-expected rise in interest rates -- could leave consumers in precarious positions. Even without any major shocks, some consumers are showing distress, with credit-card delinquencies rising.

"I would not be comfortable seeing further increase in debt-to-income ratios," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "The interest servicing burden on households looks very favorable and sustainable. The risk is if interest rates have to rise further than [investors and lenders] think. What if the Fed raises rates as much as they say they're going to? Then the picture will look much different."

While the amount of debt in delinquency has dropped over the past decade, the trend appears to be turning for some types of debt. Auto-loan delinquencies have been slowly rising for several years, and the annualized share of credit-card balances becoming 30-days delinquent climbed to 6.2% in the second quarter from 5.1% a year earlier, the New York Fed said.

J.P. Morgan Chase economist Michael Feroli said the latest pickup in spending won't last long without healthier developments, such as a pickup in productivity.

"The saving rate can't decline indefinitely," Mr. Feroli said in a note to clients this month. "In the absence of an ever-declining saving rate, real income growth will have to remain strong for consumers to continue carrying the economy," he said.

--Suzanne Kapner contributed to this article.

Write to Josh Mitchell at joshua.mitchell@wsj.com and Josh Zumbrun at Josh.Zumbrun@wsj.com

(END) Dow Jones Newswires

August 15, 2017 21:11 ET (01:11 GMT)