Retail Sales, Household Debt Slow in Sign of Lower Demand
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Demand for goods and services are falling, causing households to take on less debt and retail sales to slow.
Household debt growth slowed to 2.7% on a year-over-year basis in the last three months of 2014, down 0.1 points from the previous quarter and 0.8 points from the highest point in 2014. While above the previous year’s growth of 0.6%, there was an expectation of a continued acceleration of nonfinancial debt at the end of 2014 as consumers grew more confident and used credit to make more purchases in the economy. That trend has failed to materialize.
Demand for goods and services are falling, causing households to take on less debt and retail sales to slow.
Household debt growth slowed to 2.7% on a year-over-year basis in the last three months of 2014, down 0.1 points from the previous quarter and 0.8 points from the highest point in 2014. While above the previous year’s growth of 0.6%, there was an expectation of a continued acceleration of nonfinancial debt at the end of 2014 as consumers grew more confident and used credit to make more purchases in the economy. That trend has failed to materialize.
At the same time, businesses are taking on more debt, with nonfinancial debt rising 7.2% in the last quarter of 2014, higher than any point in the past two years and the highest point since 2007. Strong business debt growth was expected, as more companies take advantage of record low interest rates by issuing corporate bonds.
Total nonfinancial debt outstanding rose to $41.4 trillion, with household debt at $13.5 trillion. The average household net worth rose 5.2% in the last quarter of 2014 to $82,912.
Weak Retail Sales
While consumers are growing their debt loads at a slower pace, they are also postponing retail purchases. In February, retail sales fell 0.6% on a month-over-month basis, according to a new report from the Census Bureau.
While low retail sales growth has occurred in the past due to cheaper energy costs, energy actually increased consumer spending in February as gas prices rose in most markets. Retail sales excluding gasoline fell 0.8%, indicating that people are buying less on goods and services, and that cheap gas is not encouraging consumers to spend more on other products. Gasoline stations saw sales fall 23% on a year-over-year basis.
On an adjusted basis, total retail and food services spending was $437 billion, a fall of 0.5% month-over-month. This marks the second month in a row of a spending decrease.
Interest Rate Questions
The fall in retail sales and in household debt, indicate less price pressure in the economy, raising questions on whether the Federal Reserve will raise interest rates in June. Many economists have predicted a rise in rates to come in the next few months, while others have warned that the United States could face deflation from the continually strengthening dollar, low real rises in wages, and cheap oil.
Some economists have warned that a rise to the interest rate could slow down growth or even kickstart a recession. The New York Times recently published an editorial urging the Federal Reserve to delay its interest rate hike, arguing that “stagnant wage growth” is a larger concern than a fall in the headline unemployment rate that fell to 5.5% in February. The Times argued that the Fed “should hold off until wages are growing in tandem with inflation and productivity,” adding that “regulatory tools” should be used to ensure credit bubbles do not occur as a result of low interest rates and the difficult to mitigate risk in today’s credit markets.
The Federal Reserve has given no clear indication of whether it will raise interest rates in the summer, but has previously indicated that an interest rate hike may occur in 2015.
