Purchasing Power of Households Should Boost Consumer Spending
Households are arguably better positioned to increase their spending than at any time over the past decade. I define household purchasing power, in the aggregate, as a combination of income and household financial obligations. Household financial obligations include all debt obligations as well as things like housing rental costs, auto leases, insurance and property tax payments. A combination of low interest rates that reduce the cost of debt for households as well as reductions in the use of credit and households paying down debt since the recession, have all combined to lower the financial obligations of households (in the aggregate) as a percentage of household disposable income. Real wage and salary income is also increasing (even if not for all individual households). In combination, the reduction in financial obligations and rising aggregate income should result in increasing consumer expenditures. A lack of conviction in the economic recovery, a decline in home values that affect consumer’s sense of financial well-being, and higher energy prices over the past year have all helped restrain consumer confidence and spending. But energy prices are falling and home prices (in most areas) are rising. As hiring (and thus wage and salary growth) accelerates, the stage is set for a long-awaited burst of consumer spending.