Last week, the Fed said that economic activity is expanding at a “moderate” pace. What exactly does “moderate” mean, you ask? It means that the economy is strong enough to wind down bond buying, but not strong enough to raise short-term interest rates any time soon. The big problem, according to Fed Chair Janet Yellen, is that a lot of Americans are still struggling amid a weak labor market. You wouldn’t think things were so bad after reviewing the Fed’s Flow of Funds, which showed that the combined wealth of Americans rose to a new all-time high in the second quarter. Total net worth rose by about $1.4 trillion dollars to $81.5 trillion dollars, the highest on record. Of course that’s the total and we know from other reports that the wealthiest Americans are the big drivers of that increase.
But that report contained another nugget that was encouraging: Household borrowing increased at an annualized 3.6 percent pace, the fastest since the first quarter of 2008. This is not haphazard behavior that should make us think that it’s 2005 all over again. According to Capital Economics, “Relative to their incomes, households are currently carrying less debt than at any time in the past 11 years.” That low level of debt should also serve people well when interest rates eventually do rise next year.
An increase in borrowing may also indicate that consumers could be willing to spend a bit more freely, especially as we head into the all-important holiday season. Some of the biggest retailers are betting on a robust fourth quarter: UPS, Kohl's, FedEx and Wal-Mart all announced increased temporary hiring over last year; and outplacement firm Challenger Gray & Christmas predicts retailers will add more than 800,000 seasonal workers for the Oct-Dec period, which would be the strongest level of seasonal hiring since 1999.
A strong holiday season will not rescue a punk year for U.S. growth. Because of the weak first quarter, the Federal Reserve, as well as most economists, believe that the economy will only expand at an annualized pace of 2 to 2.2 percent this year, matching the sub-par growth seen throughout the recovery.
One area of the economy that continues to lag is the housing sector. The main problem is that household formation – the establishment of a new home with roommates, partners or alone by renting or buying – remains low. That too is a remnant of the recession, especially as Millennials juggle student debt and the desire to strike out on their own. Pew Research found that just over a third of all 18 to 31-year-olds live at home, the highest rate since 1969. Economists believe that as the economy and job market improves and mortgage rates remain at low levels, both existing and new home sales will show some improvement. Expectations remain low for the time being.
MARKETS: Call it the BABA-BOUNCE…stock indexes hit record highs as Chinese e-commerce giant went public last week. On the first day of trading for Alibaba, shares shot up by 38 percent to $93.89. That means that the company, which sold its shares to the pubic at $68 per share, left a lot of money on the table. Founder Jack Ma didn’t seem particularly worried about the price of the stock…his net worth exploded to $18 billion after the IPO!
- DJIA: 17,279 up 1.7% on week, up 4.2% YTD
- S&P 500: 2010, up 1.3% on week, up 8.8% YTD
- NASDAQ: 4579, up 0.3% on week, up 9.7% YTD
- 10-Year Treasury yield: 2.58% (from 2.61% a week ago)
- October Crude Oil: $92.41, up 0.2% on the week
- December Gold: $1216.60, down 2.8% on the week
- AAA Nat'l average price for gallon of regular Gas: $3.35 (from $3.49 a year ago)
THE WEEK AHEAD:
8:30 Chicago Fed Survey
10:00 Existing Home Sales
10:00 New Home Sales
8:30 Weekly Jobless Claims
8:30 Durable Goods Orders
8:30 Q2 GDP – Final Reading (previous: +4.2%)
9:55 Consumer Sentiment