Savannah Chamber

10 4 Consumer Spending The consumer will be the main strength of the 2020 economy. On an inflation-adjusted basis, personal consumption expenditures will grow by over one percent in 2020. Job creation will slow, but it will remain positive and therefore the economy will operate only slightly below full employment. That circumstance will support modest wage and salary growth despite economic headwinds from the trade war. Each escalation of the trade war lowers confidence and household wealth, however. Lower interest rates will prevent household balance sheets from deteriorating. Trade tensions, stock market losses, and recession fears lower consumers' confidence, but modest job growth and home price appreciation should keep confidence slightly above recessionary levels. Growth of disposable personal income will give consumers the wherewithal to spend, but worried households will opt to save a slightly larger proportion of income in 2020. Wealth-effect spending will probably be entirely absent in 2020 and may turn negative. That's a fundamental negative for consumer spending as growth in household wealth has been on the increase since 2009, exceeding income growth in most years. Credit will be available to households, but not any more so than in 2019. Credit will be less expensive, however. Credit markets therefore should continue to expand. The sharp slowdown in job growth and a higher unemployment rate will slow credit growth, however. Traditional lenders probably will not tighten lending for home mortgages but will tighten lending for automobile loans. Many households have locked in historically low mortgage rates, but that will limit the number of households that will benefit from refinancing activity in 2020. Nonetheless, consumers will take on more home equity debt. The proportion homeowners who extract cash from the refinancing of their home mortgages will rise slightly, but it will not surge as it did prior to the Great Recession. Traditional lenders will tighten lending for bankcard credit. Credit card debt therefore will expand more slowly in 2020 than in 2019 as lenders become more reluctant to push into market segments with lower credit scores. Finance-technology startups will continue to expand subprime lending to customers with poor credit ratings, however. Credit card default rates will rise. One reason why consumer spending will continue to grow even with the overall economy operating very close to recession is that household finances are in very good shape. In contrast, going into the Great Recession, household finances were in terrible shape. U.S. consumers were heavily indebted and very short on savings. Indeed, by almost any measure households were extremely overextended. For example, the household debt service ratio – debt payments divided by after-tax income – stood at an all-time high of nearly 14 percent in 2005-2008. If you add in other financial obligations, such as automobile lease payments, rental payments on tenant-occupied property, homeowner's insurance, and property tax payments, you get a financial obligation ratio that was nearly 19 percent. That was also an all-time high. A very depressed household savings rate also reflected consumers' largess. The household savings rate fell to the lowest levels experienced since the Great Depression. Essentially, households opted to boost current spending by extracting more and more wealth from their homes – this, of course, was facilitated by lax credit standards. The house became the ATM. As households shifted their priorities from spending to savings, the personal savings rate rose from its cyclical trough of only 2.2 percent in mid-2005 to a post-Great Recession high of 12 percent in early 2012. In 2012, households recovered all the wealth they lost to the Great Recession. Due to these wealth gains, excellent labor market conditions, and high levels of consumer confidence, the savings rate declined to 6.5 percent in 2016. Over 2016 to 2019, the savings rate slowly rose to 8.0 percent. In 2020, the performance of the stock market and less confidence will cause consumers to save a slightly higher proportion of their income. The savings rate will rise to 8.2 percent. This modest increase in the savings rate will be a weak headwind to consumer spending and in turn to U.S. GDP growth. Over the long term, most households will find that even an 8.2 percent savings rate will not be adequate to maintain current living standards in retirement, especially if returns on financial assets remain below historical norms. The household savings rate therefore needs to rise to 10 percent, or more. That is quite attainable – a nine percent savings rate prevailed from 1961-1990. The bottom line is that a rising savings rate will restrain, but not stop the growth in consumer spending in 2020. The restoration of the discipline of saving represents a return to normalcy that helped households unwind imbalances that developed in their balance sheets prior to the Great Recession. For example, the household financial obligation ratio was 275 basis points lower in early 2019 than in late 2007. In fact, the 2019 household financial obligation ratio is as low as the levels that prevailed in the early-1980s and lower than the levels that prevailed in the early-1990s. The lower financial obligation not only inspires confidence, but it also allows households to more easily service their debt. This protracted period of household de-leveraging was painful, but it was also necessary. In early 2019, the ratio of

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