Inflation Continues to Outpace Wage Growth, Spurring Household Debt and Spending

According to the latest Federal Reserve Bank of New York Household Debt and Credit Report, total U.S. household debt rose by 0.9% to $17.05T in the first quarter of the year, rising nearly $3T from pre-pandemic levels. In the details, mortgage balances climbed by $121 billion to $12.04 trillion at the end of March, and auto loan and student loan balances increased to $1.56 trillion and $1.60 trillion, respectively. Credit card balances, however, were unexpectedly flat at $986 billion.

This morning, retail sales rose 0.4% in April following a 0.7% decline the month prior. Year-overyear, retail expenditures are up 1.6%. Auto sales rose 0.4% while gasoline sales plunged 0.8%. Excluding autos, retail sales rose 0.4% and 2.1% year-over year. Excluding both autos and gasoline purchases, sales rose 0.6% and 4.3% from this time last year.

In the details, health and personal care sales rose 0.9% at the start of Q2, building materials sales increased 0.5% and general merchandise purchases gained 0.9% despite a 1.1% decline in department store sales. On the weaker side, furniture sales dropped 0.7%, electronics fell 0.5% and sporting goods purchases dipped 3.3% in April.

Bottom Line: While consumers are clearly accumulating more debt – understandably – as inflation continues to outpace wage growth, the starting point was one of relative health with household debt payments relative to disposable personal income dropping to a multi-decade low in the aftermath of the pandemic. Which is to say consumers weren’t just buying electronics or Pelotons during the lockdown but also paying down debt. Now, going forward, while few would outright advocate for consumers to take on new amounts of credit card debt, the household balance sheet clearly has additional runway to support further debt accumulation before it becomes a sizable red flag or impediment to spending activity suggesting the consumer may remain “resilient” for at least some time longer, as this morning’s April retail sales report further exemplifies.

Also, this morning, capacity utilization rose from 79.4% to 79.7% in April while industrial production unexpectedly rose 0.5%.

And later this morning, the NAHB Housing Market Index is expected to hold steady at a reading of 45 in May.

Looking beyond the economic calendar, optimism regarding the debt ceiling is lingering in the air after weekend talks were reportedly "moving along.” Of course, that being said, the lack of meaningful progress continues to wreak havoc on investor confidence as the June 1 deadline rapidly approaches. According to Treasury Secretary Janet Yellen time is running out, reiterating that the “impasse has already increased the debt burden to American taxpayers.”

According to reports, ahead of his departure for the G-7 summit in Japan, President Biden is scheduled to meet with House Speaker Kevin McCarthy and other Congressional leaders later today at 3pm ET.

As we’ve written about extensively, while the risk of default still remains an unlikely scenario, the consequences of such an incident are very real and should be avoided if possible.

As both sides are aware, failure to raise the debt ceiling could result in a downgrade to the nation’s credit rating, insolvency issues throughout the financial system, elevated future borrowing costs and the potential to send shockwaves through an already fragile financial system still reeling from the recent collapse of Silicon Valley Bank among others.

For the Fed, while officials are watching the standoff in Washington and have acknowledged the ongoing volatility in the banking sector, inflation remains the Committee’s primary concern with the lack of disinflation “frustrating” for policy makers. According to Fed Vice Chair Philip Jefferson, progress on core inflation is "discouraging" and disinflation in core goods prices is taking longer than expected. Speaking at Stanford University’s Hoover Institution in California on Friday, Jefferson said, “Outside of used motor vehicle prices, which fell unexpectedly in March, disinflation in core goods prices is occurring at a slower pace than expected.”

To his point, while inflation has moved off earlier highs, price pressures remain above the Committee’s target with downward momentum painfully slow. The core CPI and PCE, for example, have both declined by only 50bps in the last six months and are still more than double the Fed’s 2% target.

In May, the Fed indicated a willingness to move to the sidelines at least temporarily and may still do so. The latest inflation data, however, do not support a pause. Rather, a decision to stand down in June would be made despite the still-elevated inflation data.

Following Jefferson, a number of Fed officials take the stage this week. Yesterday, Atlanta Fed President Raphael Bostic gave opening remarks at the Federal Reserve Bank of Atlanta’s Annual Conference, and Minneapolis Fed President Neel Kashkari took part in a moderated discussion at the ACEC’s Minnesota Transportation Conference.

Later in the week, Cleveland Fed President Loretta Mester, New York Fed President John Williams and Fed Chair Jerome Powell will take the stage at various events no doubt updating their view on inflation, the banking sector, the debt ceiling debate and what it all means for the June rate decision and beyond.

Yesterday, the Empire Manufacturing Index unexpectedly plunged from 10.8 to -31.8 in May, a four-month low and the largest decline since April 2020. According to the median estimate on Bloomberg, the index was expected to decline to a reading of -3.9.

In the details of the report, prices paid rose from 33.0 to 34.9, while prices received ticked down from 23.7 to 23.6 in May. Additionally, the number of employees gained from -8.0 to -3.3, and the six-month general business conditions index increased from 6.6 to 9.8. On the other hand, new orders dropped from 25.1 to -28.0, and inventory declined from 8.2 to -12.3 in May.

Tomorrow, housing starts are expected to decline 1.4% in April and building permits are expected to be unchanged.

-Lindsey Piegza, Ph.D., Chief Economist