The Independent Market Observer

5/31/13 – More Good News About the U.S. Economy

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on May 31, 2013 9:54:48 AM

and tagged Market Updates

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The good news just keeps coming. This week, we’ve had a seven-year record for home price increases, up over 10 percent from the year before, as well as a rise in the consumer confidence index to a five-year high.

Both show that the improvement in the U.S. economy is wide and sustainable. Representing two-thirds of the economy, consumer spending is the most important part, and higher consumer confidence and wealth suggests that spending will continue—and may well accelerate.

Looking at this graphically, we can see that household net worth, through the fourth quarter of 2012, had come close to the previous highs. With continued gains in the first half of 2013, we are very probably at new highs. Housing price gains translate directly into wealth for a very wide slice of the population; this is the good side of the damage that was done in the crisis, when prices declined.


The other critical piece of consumer spending is income. There are a couple of aspects to this—the total number of employees, average hours worked, and average hourly wage—all of which are multiplied together to get private labor income, as follows:


You can see that, here too, income is close to pre-crisis highs, suggesting that the confidence is actually well founded on an employment basis.

The question now becomes, if we are at or close to the previous highs, is our current situation any more sustainable than it was in 2007? I would argue that it is. Previously, spending was based on borrowing. Now overall borrowing is in decline, as follows:


In fact, debt would have declined much more without the government.


Thus, we have seen consumer spending grow while borrowing declines. This is sustainable.

Overall, the U.S. economy is in a good place, with a stable level of sustainable growth, which may well accelerate in the next couple of quarters. We still remain vulnerable to external shocks, of course, but, if they occur, those shocks should also have longer-term positive effects. While there are certainly reasons for concern, I remain optimistic about the real economy and expect current trends to continue for the near to medium-term future.

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