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Tailwinds for the consumer continue to build

February 04, 2021

Graph depicting average acceleration in annual real personal consumption spending growth by level of the MBA refinancing index

Source: Mortgage Bankers Association and Bureau of Economic Analysis

The tailwinds building behind the U.S. consumer continue to gather, increasingly pointing to a boom in spending in the second half of the year. Senator Joe Manchin, the key swing vote now that the upper chamber is evenly divided between Republicans and Democrats, indicated yesterday that he would support a large fiscal stimulus package, saying “If it’s $1.9 trillion, so be it”. Manchin has expressed opposition to certain parts of President Biden’s American Rescue Plan proposal, such as the $15 minimum wage, but his backing for the price tag more generally likely assures that something close to the White House plan will come to fruition. Fiscal stimulus is rarely a game changer, but the final tally here is shaping up to be large enough to have some impact. As we noted in this space a month ago, the two aid packages signed into law thus far in the current cycle are already well in excess of those passed during the Great Recession as a percentage of GDP.

The consumer also continues to benefit from ultra-accommodative monetary policy. Rock bottom benchmark rates and the Fed’s ongoing commitment to holding policy steady for an extended period have kept long-term yields in check, boosting home sales and fueling a surge in mortgage refinancing. Refis were up by 11.1 percent last week and have now climbed by nearly 60 percent over the past year. Moreover, they are now at a level that has historically driven a pickup in consumption growth. When the MBA’s refinancing index has averaged a reading of at least 4000 on a quarterly basis, as it has thus far in 2021, consumer spending growth has gone on to accelerate by an average of nearly one full percentage point over the subsequent year.

The most promising trends for the consumer outlook, however, are the budding signs that the soft patch in the labor market may be starting to fade. Jobless claims have fallen for two straight weeks and this morning’s ADP report showed a better-than-expected rebound in employment last month after the first decline of the recovery in December. We will get a more definitive read on labor market conditions with the government’s payroll data on Friday, but hints that the worst of the relapse is passing – as would be expected with a falling new case count and some loosening of restrictions on business activity – are accumulating. St. Louis Fed President Bullard said today that the labor market recovery is four years ahead of that in the last cycle, a comment that jibes with the trend in the unemployment rate and perceptions of job availability. This dynamic, in combination with a high level of pent-up demand and a healthy infusion of cash through fiscal stimulus and mortgage refinancing, is setting the stage for a big leap in spending as the year progresses.

Daily Trivia

What original Dow Jones Industrial Average component was removed twice in the late 19th and early 20th century before beginning a 110-year run in the index in 1907?

Previous Question

What phrase did Alan Greenspan popularize after a meeting with future Nobel laureate Robert Shiller in 1996?


Irrational exuberance


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