Personal Income Report for February

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Kelley Leslie Richards
6 years ago
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1 Analysis Report Contacts Felix Boni Chief Credit Officer Alfonso Sales Economic Analysis Manager Mireille García Economics Associate HR Ratings comments on the weakening in personal income and consumer spending, and the vulnerability of the later to declining personal savings. The February report on personal income and consumer spending shows continued declining growth and suggest a weak first quarter GDP and a continuation of weakness in future quarters, if current trends in spending and personal income are not reversed. We also note that stronger growth in consumer spending in previous quarters was significantly the result of declining rates of personal savings in order to bolster consumer expenditures. Thus, an important question going forward, especially assuming continued weakness in disposable personal income growth, is how much lower the savings rate can fall. Table 1: Quarterly Personal Consumer Expenditures in Billions of Real USD Change vs. Period: feb-16 nov-16 feb-17 Prior Year Immediately Prior* Goods 3,963 4,106 4, % 3.48% Durable Goods 1,528 1,635 1, % 4.28% Non- Durable Goods 2,467 2,514 2, % 3.04% Services 7,398 7,537 7, % 1.20% Total 11,357 11,634 11, % 1.93% Source: HR Ratings w ith data from the BEA converted into billions of real 2009 USD (3mma). *Anualized change vs. immediately prior quarter Data might not sum due to the use of the different appropriate inflation deflators In the quarter ending in February, consumer spending increased at a modest annualized real rate vs. the quarter ending in November of 1.93%. In contrast, consumer spending in the quarter was up 2.93% vs. the same period in 2016, evidence of the deceleration observed over the last twelve months. Unless the March number reverses the weakness seen in both January and February, the 1Q17 consumer report is likely to show weakness and with it the overall GDP number, especially as consumer spending represents almost 70% of overall GDP. Table 2: Annual Personal Consumer Expenditures in Billions of Real USD feb-15 feb-16 feb vs vs. 16 Goods 3,786 3,928 4, % 3.81% Durable Goods 1,422 1,510 1, % 6.30% Non- Durable Goods 2,388 2,449 2, % 2.55% Services 7,151 7,336 7, % 2.32% Total 10,936 11,260 11, % 2.80% Source: HR Ratings w ith data from the BEA converted into billions of real 2009 USD (12mma). Data might not sum due to the use of the different appropriate inflation deflators Table 2 shows the weakening growth over a longer twelve-month period of consumer spending which in real terms was up a still strong 2.8%, but less than a even more robust expansion of almost 3% for the twelve month period ending in February The 1.93% annualized growth seen in Table 1 suggests that unless the trend is reversed we are likely to see additional declines in the LTM metric. Hoja 1 de 8

2 The Graph 1 provides the trend in consumer spending, both on a quarter vs. immediately prior quarter basis, as well as on a trailing twelve-month basis. The quarterly trend is definitely downward with declines in growth for two consecutive months. Also significant, there has been a downward trend, although briefly interrupted by two positive months, beginning even earlier in July The deceleration that appears to be the underlying trend in consumer spending is significantly the result of a comparable, indeed perhaps stronger decline in growth in personal income which in the long term is the major driver of consumer spending. Graph 2 below shows the relationship between quarterly changes in personal consumer spending and disposable personal income. The relationship is relatively close with the differences in movement largely explained changes in personal savings. Graph 2 shows the pronounced fall in quarter over quarter real growth in disposable personal income, as well as how consumer spending, also declining, has been stronger than income. As HR Ratings will show in a subsequent graph, this is linked to changes in personal savings. Hoja 2 de 8

The details of personal income are seen in Table 3 below. Income before transfers and taxes for the quarter ending in February was up a modest 1.39% on a real USD annualized basis vs.

3 The details of personal income are seen in Table 3 below. Income before transfers and taxes for the quarter ending in February was up a modest 1.39% on a real USD annualized basis vs. the quarter that ended in November. However, once we add transfer income (virtually all from government) and deduct taxes, including social security contributions, disposable personal income (DPI) was up an even weaker 1.16%. The gap between the 1.16% increase in DPI and the advance of 1.93% in personal Hoja 3 de 8

4 consumer expenditures was met by a sharp drop of 13.8% in personal savings, which more than compensated for the smaller and normally more stable change in the sum of nonexpenditure outflows of interest and transfer payments. As a consequence, the personal savings rate for the quarter that ended in February fell to 5.41%, lower than the 5.63% in the quarter that ended in November and the even higher 6.07% savings rate for the threemonth period that ended in February Table 3 shows the evolution of personal savings which has been on a declining trend for several quarters, such that personal savings are now not simply increasing at a slower rate but are declining. There was a rebound of sorts in the February quarter, but real USD savings still declined by 13.8% on an annualized basis vs. the November quarter. This analysis raises the question of how much further personal savings can weaken, and by doing so, compensate for the much weaker growth in personal income. The historical evolution of the personal savings rate is seen in Graph 4 below. At a trailing twelve-month moving average rate of 5.73%, savings can continue to fall and thus can continue to support consumption in the context of weak growth in personal income. In this current period, savings appears to be countercyclical. However, during the years immediately prior to the financial crisis of 2008, the savings rate fell substantially adding even more demand to a strong economy while during the crisis, and the years immediately following, the savings rate rose substantially, hindering the recover. Hoja 4 de 8

Table 4 shows the evolution of the different accounts of personal income and consumer expenditures. First, we would note the decline in the growth of DPI.

5 Table 4 shows the evolution of the different accounts of personal income and consumer expenditures. First, we would note the decline in the growth of DPI. Second, consider how in the LTM through February 2016 consumption increased at 2.97%, less than the 3.26% rise in DPI in the same period. This is because at that time personal savings were still on the upswing, rising 7.55%. A year later the situation is reversed with the much lower rate of growth in DPI of 2.64%. This is still a lower rate of growth in savings, of only 0.29%, such that consumption rose by 2.80%, more than the 2.64% increase in DPI. This demonstrates the role of savings as a major factor in determining consumer spending. Hoja 5 de 8

6 A final consideration is the fact that employee compensation expanded at higher rates in both twelve-month periods ending in February 2016 and February 2017 than did earnings befores transfers and taxes. For the February 2016 period (vs. the twelve months ending in February 2015) the rates were 4.24% vs. 3.51%. For the LTM through February 2016 the rates were lower but still employee compenation increased by a higher rate: 3.0% vs. 2.64%. This trend helps to compensate for periods prior to the financial crisis of 2008 in which employment compensation as a percentage of income, before transfers and taxes, was higher even than current levels. Hoja 6 de 8

7 HR Ratings Senior Management Management Chairman of the Board Vice- President Alberto I. Ramos Aníbal Habeica Chief Executive Officer Fernando Montes de Oca Analysis Chief Credit Officer Chief Operating Officer Felix Boni Álvaro Rangel Public Finance / Infrastructure Financial Institutions / ABS Ricardo Gallegos Fernando Sandoval ricardo.gallegos@hrratings.com fernando.sandoval@hrratings.com Roberto Ballinez roberto.ballinez@hrratings.com Corporates / ABS Methodologies Luis Quintero Karla Rivas luis.quintero@hrratings.com karla.rivas@hrratings.com José Luis Cano joseluis.cano@hrratings.com Regulation Chief Risk Officer Head Compliance Officer Rogelio Argüelles Laura Mariscal rogelio.arguelles@hrratings.com laura.mariscal@hrratings.com Business Development Rafael Colado rafael.colado@hrratings.com Business Development Francisco Valle francisco.valle@hrratings.com Hoja 7 de 8

8 Mexico: Avenida Prolongación Paseo de la Reforma #1015 torre A, piso 3, Col. Santa Fe, México, D.F., CP 01210, Tel 52 (55) United States: One World Trade Center, Suite 8500, New York, New York, ZIP Code 10007, Tel +1 (212) *HR Ratings de México, S.A. de C.V. (HR Ratings), is a Credit Rating Agency authorized by the National Banking and Securities Commission (CNBV), registered by the Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NRSRO) for the assets of public finance as described in clause (v) of section 3 (a) (62) (A) of the US Securities Exchange Act of 1934 and certified as Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). HR Ratings de México SA de CV (HR Ratings) ratings and/or opinions are opinions of credit quality and/or regarding the ability of management to administer assets; or opinions regarding the efficacy of activities to meet the nature or purpose of the business on the part of issuers, other entities or sectors, and are based exclusively on the characteristics of the entity, issuer or operation, independent of any activity or business that exists between HR Ratings and the entity or issuer. The ratings and/or opinions assigned or issued do not constitute an investment recommendation to buy, sell, or hold any instrument nor to perform any business, investment or other operation. The assigned ratings and/or opinions issued may be subject to updates at any time, in accordance with HR Ratings methodologies. HR Ratings bases its ratings and/or opinions on information obtained from sources that are believed to be accurate and reliable. HR Ratings, however, does not validate, guarantee or certify the accuracy, correctness or completeness of any information and is not responsible for any errors or omissions or for results obtained from the use of such information. The degree of creditworthiness of an issue or issuer, opinions regarding asset manager quality or ratings related to an entity s performance of its business purpose are subject to change, which can produce a rating upgrade or downgrade, without implying any responsibility for HR Ratings. The ratings issued by HR Ratings are assigned in an ethical manner, in accordance with healthy market practices and in compliance with applicable regulations found on the rating agency webpage. There Code of Conduct, HR Ratings rating methodologies, rating criteria and current ratings can also be found on the website. Ratings and/or opinions assigned by HR Ratings are based on an analysis of the creditworthiness of a country, entity, issue or issuer, and do not necessarily imply a statistical likelihood of default, HR Ratings defines as the inability or unwillingness to satisfy the contractually stipulated payment terms of an obligation, such that creditors and/or bondholders are forced to take action in order to recover their investment or to restructure the debt due to a situation of stress faced by the debtor. Without disregard to the aforementioned point, in order to validate our ratings, our methodologies consider stress scenarios as a complement to the analysis derived from a base case scenario. Hoja 8 de 8

Personal income and savings January 2018

Personal income and savings January 2018 United States of America Analysis Report March 2, 2018 Contacts Felix Boni Chief Credit Officer felix.boni@hrratings.com Jordy Juvera Economics Associate jordy.juvera@hrratings.com