Happy Consumers Ramp Up Spending, But Risks Abound -- Update

By Josh Mitchell and Josh Zumbrun Features Dow Jones Newswires

American consumers ramped up spending last month, supported by low unemployment, rising confidence, soaring stock prices and a sense that 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's a catch: Households are again running up more debt, and they are saving less.

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. Economists responded to the reports by lifting projections for economic growth in the current quarter. Many economists say 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.

Many economists doubt such a pace can be sustained in the long run, given an aging population and slow workforce productivity growth. Still, reaching 3% growth in the third quarter -- if achieved -- could be cited as a milestone by the Trump administration, which has made that a primary objective.

Higher 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. A company executive attributed growth in part to recent gains in inflation-adjusted wages. Though wage growth is slow, low inflation helps a dollar earned go further.

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"It stands to reason -- got more money in your pocket, you're going to spend some more money on your home," Home Depot Chief Financial Officer Carol Tome said Tuesday in a conference call.

The spending pickup comes amid a lack of movement in Washington on a tax-overhaul plan and a Republican bid to change the health-insurance system, and against a backdrop of rising consumer and business confidence.

But the latest spending trends carry some risks. A big chunk of it 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 saving 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 Americans' wages aren't keeping up with their needs and desires to spend.

For now, low interest rates are keeping a lid on the amount of money per month consumers have to devote to paying off the debt. Debt-service payments account for roughly 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.

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

"From a short-term growth perspective it's a positive, but 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."

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

(END) Dow Jones Newswires

August 15, 2017 14:34 ET (18:34 GMT)