Major Data Misread: “The US Consumer Is Strong, Unemployment Is Low”

Don’t just look at the data, look at the way you look at the data.

“The US Consumer is strong, US Unemployment is low.” ← “Buy Equities”

There is a major difference between “Consumer SPENDING” and “Consumer STRENGTH.” US Consumer Is SPENDING, not “STRONG”

If you’re currently buying equities, understand that it’s the Fed Repo Operations + Corp buybacks that you’re counting on (which is fine)- but if your rationale is based on this notion that “all is well with the data on the US Consumer & Labor Market,” I loudly beg to differ.
Based on data from the Top 100 banks by assets, (in-line with “All Commercial Banks” category), overall US credit card delinquencies remain low – so household consumer leverage is “nothing like ‘08.” True.

Now look at the same chart + data from the other 800+ lending institutions ex 100 largest by assets (green). Delinquency rates have spiked and sustained above ‘08 levels – but not reflected in “All Commercial Banks” data.

Board of Gov Federal Reserve System

So whatever JPM, Citi, Wells & BAC report, they obviously don’t cater to the non-credit worthy borrowers, where vast swarms of Americans are categorized, and increasingly so. They need credit regardless, and resort to alternative lending- payday loans, credit unions, and increasingly, digital channels. Essentially, the green line is the US shadow banking market as self-defined by the Federal Reserve as what’s not included in “All Commercial Bank” data – and then set policy accordingly, with real consequences. That green spike starting end of ‘15 vs Fed Funds rate hikes start are by no means coincidental.

No wonder the disenfranchised want to blow up the establishment – they’re not even considered to be part of the economy. We literally measure our labor market by “Non Farm Payrolls” and set policy (independent agriculture unemployment skyrocketing at 2x nonfarm- making rapid rate hikes highly inappropriate if they were counted)- and then we wonder why we have data and election polling shocks. So with China’s tariffs directly hurting US ag, and consensus (+Beijing’s) view that Trump needs a “deal” or a “Phase 1” to regain farmer support and win re-election (& therefore buy equities) – I’d think again. The perception that Trump’s policies, for better or worse, at least recognize the forgotten’s very existence (let alone being the one fighting for them)- therefore, continued trade conflict cements unconditional support even if against their own direct near term economic interests. And they certainly don’t own/care about the S&P500.


Digital Payments: Japan’s 2 Decade Deflation & US Consumer Spending

Digital payments in the US came just in time to keep the consumer credit driven economy running, especially among young people. Digital payments in any form are significant in the behavioral psychology of personal spending, as per my previous/ongoing work on Japanese cash-culture as the cause of 20+ years of deflation. M0 / narrow M1 money supply (cash & coins in circulation) move inverse with consumer spending (email me for full report):

Japan Cash Component of M1 vs CPI

Physical cash leaving your wallet is harder to spend, with your remaining balance (if any left) immediately visible, whereas a digital swipe of plastic without an instant account balance is far easier on both sides of the register than counting bills & coins, plus the momentary guilt-free, blissfull ignorance of account balance that non-cash payments provide. This is what I refer to as the demonetization of money. Digital cash (credit cards, IC chips, payment apps, QR codes, cryptocurrencies etc) is harder to track and limits personal spending in the moment – plus the new, novelty “cool” factor- ask any of my fellow millennials about how often they Venmo (and then ask if they carry cash. And then ask how leveraged they are. And then hear about collection of points, mileage, priority perks that greenbacks have never offered).

Demonetization is the casino biz model– if you had to reach into the wallet each time you wanted to double down, you might not. Whereas, exchange paper currency for clay chips, and its too easy to throw $100 on black- you also delay the “loss” feel.

Delinquency Rates for Smaller Lenders outside of what the markets/Fed pays attention to rises, just as a sharp increase in searches for local personal loans occurs, which also coincides with interest/adoption of digital money.

Less cash, both in circulation and in individual bank accounts + ease of obtaining shadow credit (and subsequent ease of default) = consumer spending, not consumer strength.

Consumer credit on a nominal basis has increased 4x in the last 20 years, and risen sharply since 2015 – cyclical behavior. This is a credit fueled consumer economy, but so what? Rates are low, credit is flowing, consumer is fine – no, not really, as per below.
On a YoY Rate of Change % basis (which is what really matters in macro forecasting – rate of change, not absolute / arbitrary levels), both the rate of change in PCE and Consumer Credit have fallen sharply. Moreover, these two trends have started to move together in lockstep since mid-2016, suggesting just how dependent on credit the consumer spending behavior has become.
Among the smaller lenders, delinquency rates on credit cards and consumer loans used to track one another closely for decades- until now. What changed this time? Likely the mass adoption of new forms of digital, social and P2P lending.
…which is most heavily utilized by younger consumers, who are heavily indebted by student loans and thus rely on credit cards before they even have a chance to enter the workforce to properly build a strong credit profile.

So when investors are opening NEW long positions based on “what recession- look at the data, the consumer is strong,” they fail to realize this isn’t genuine consumer strength from a robust private sector firing on all cylinders, ever-rising real wages and increased disposable incomes. Consumer strength and consumer spending are not the same, and consumer spending on credit is the exact opposite of consumer strength- pulling earnings forward. And as delinquencies pile up, credit gets cut off, and consumer spending ends.


”Unemployment is low, labor market is strong.” ← “Buy Equities”

The second flawed fundamental macro argument that all is well with the US (and therefore global) economy: “unemployment is low.” Again, a misread of data. First as a reminder, unemployment is a backwards-looking, lagging indicator, so unemployment low says nothing about the labor force today/tomorrow. And putting aside all of the facts around labor force participation rates, the post-crisis stickiness of retaining existing employees, jobless claims rising- there are 2 points I’ll mention.

1) What sector has been consistently carrying unemployment lower quarter after quarter after quarter? Healthcare services. Why? The declining rates of uninsured Americans bottomed in 2016 and reversed higher, with 1.2mn more people without insurance over the past 2 years. Uninsured doesn’t mean not in need of medical services, it simply means deferred healthcare servicing until it’s an emergency room visit, for which the costs are many many multiples higher. More sudden emergency room rush-ins (as in, no appointments) means more healthcare staff needed. It also means more people spending more money on a non-optional expenditure- and that’s also consumer spending and GDP positive. But again, not the type of healthy growth (literally) the bulls and policy makers see.

2) Very simply- we’re in the 14th inning of the current artificially elongated business cycle, thus the unemployment rate low and dropping is exactly what should/is happening in late cycle. But unlike bond yields, unemployment % rates can’t break below the zero bound, so there’s not much lower they can go- but there’s certainly an asymmetry with how much of a HIGHER level they can go- and they will. When corporates report quarter after quarter of buyback-engineered EPS growth and CEO compensation unconditionally rises, the worker bees get angry and want their share (see GM strike). They then get their share via wage increases, but production doesn’t grow in tandem, which means margin compression in an already low/no topline growth, late cycle trend. And when margins get squeezed, you cannot lower wages after you’ve just raised them, so what happens next? You lay people off. And that rock bottom unemployment rate starts ticking upwards. So at this stage of the cycle, it makes little sense for the market to rally when payrolls data comes out “much stronger than expected.”

CONCLUSION:

No upside left to improve labor, nor already “strong” consumer spending, and sentiment that Fed might start HIKING rates again- all of these should be market negative. Whoever wants to chase FOMO, be my guest, but for me personally, opening a new long here/now sounds like a fantastic way to balance risk/reward, heavily skewed towards the former.



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Weston Nakamura | wnakamura@acrossthespread.com | New York & Tokyo