Insight on Consumer Credit and Spending

Last week brought dramatically bad news to the financial markets, but the economic data were at least mixed. We've got a heavy news week ahead on the economic front, however, with retail sales, housing, manufacturing, and the inflation picture all in the mix.

Consumer Credit. Among notable reports last week, consumer credit declined at an annualized rate of nearly 4% in August, according to the Federal Reserve. The decline was concentrated in non-revolving credit, as opposed to credit card debt. In turn, looking at volume by the form of holder, the decline was concentrated entirely in the "pools of securitized assets" category; credit continued to grow in each of the other six major categories. This is mixed news, perhaps. The loss of confidence in structured credit markets is certainly weighing on financial market and economic performance, but at least we aren't seeing contraction in direct consumer credit extensions by banks, finance companies, credit unions, and nonfinancial businesses, at least not yet.

Consumer Spending. Whether credit is available or not, however, the basic point is that consumer spending is weakening significantly. Retail and food services sales declined in July as well as August, and the reports from major retailers about September indicate an accelerating decline may be getting under way. The overall retail sales report for September will be released on Wednesday and will likely show the third consecutive month of falling retail sales for the first time since 1992. Retailers concentrated in discretionary items and durable goods continued to post relatively weak results in September, and expectations for the holiday season have been pared back considerably.

Housing. We did have some tentative good news coming from the housing industry, however. The National Association of Realtors reported its "Pending Home Sales Index." The index actually posted a pretty strong increase in August and has been on an irregular but upward trend in the latest reporting months. This data relies on contracts signed, but not yet closed, and while the data is lagged, the NAR describes it as a good leading indicator. Other housing sales and construction reports bear watching in coming weeks for any confirming evidence that the worst is over in the housing area. Housing indicators coming out in the week ahead include the weekly Mortgage Bankers Association report on mortgage applications (Wednesday), the survey of homebuilder expectations conducted by the National Association of Homebuilders (Thursday), and the monthly housing starts report (Friday).

Manufacturing. We have important reports about manufacturing activity coming out this week, including the Federal Reserve's monthly report on industrial production on Thursday and local purchasing managers' surveys from New York (Wednesday) and Philadelphia (Thursday). Manufacturing activity had been holding up relatively well through 2008, compared with what can happen during a recession, but the latest report from the national purchasing managers' survey was pretty bleak, showing one of the sharpest one-month declines since the early 1980s. The manufacturing reports this week will be useful to watch to validate or discount that signal from the national purchasing managers' survey.

Inflation. Finally, we have important reports about inflation coming out this week as well. The local purchasing manager surveys just mentioned include valuable pricing indicators, but the biggest inflation report coming out this week is the consumer price index, released on Thursday.