This week’s Chart of the Week examines the importance of personal consumer expenditures (PCE) on the U.S. economy. From 1970 to 1st quarter 2013, PCE has grown from 60% to 69% of GDP as the health of the economy has become more dependent on consumers. While many factors can account for the PCE figure, one of the more telling data points is the personal savings rate: if consumers are spending more, they must naturally be saving less. Not surprisingly, the personal savings rate has declined from 12.3% in 1970, indicating a trend of consumers saving less and spending more. Savings rates hit all time lows leading up to the recent recession as consumers spent outside of their means in an overheated economy. In reaction to the economic downturn, consumers became conservative and increased their savings, applying further negative pressure to an already troubled economy. Currently the savings rate has trended back down, a sign that fear has subsided and investors are spending more. This coupled with favorable trends in housing and consumer confidence are positive indicators for future economic growth.

Given that consumption constitutes roughly 67% of U.S. GDP, it is not surprising that the trends of retail sales are closely watched to reveal emerging growth or contraction in the economy. In an effort to uncover evidence of economic expansion in the U.S., our chart of the week examines the monthly change of retail sales over the last six years, with a focus on the last few months of 2013. In particular, the past four consecutive months of gains in retail sales provide some additional optimism about GDP growth for the second half of the year. While July fell short of expectations growth was still positive (a 0.2% gain in retail sales), though not as strong as June’s increase of 0.6%. The United States Commerce Department stated that business surpluses were unchanged in June while sales sprouted, which implies that companies will need to restock their inventory in the coming months. In turn, economic growth should follow. Overall, this contributes to the growing confidence about the U.S. economy: gains in employment, growing home and equity prices, rising household wealth and more accessible consumer credit are translating into better growth in retail sales and the broader economy.

Recently we have witnessed the much publicized rise in long term interest rates. Meanwhile, short term rates have remained near record lows as evidenced by 3-month Treasury bill yields near zero. The above chart compares the spread between the yield on 10-year Treasury bonds and 3-month Treasury bills with real GDP growth. The chart shows a significant widening of the spread in recent months. Historically, a rising spread between the 10-year and 3-month Treasury bonds has been a predictor of strengthening future economic growth, while a declining or inverted spread often foreshadows slowing economic growth or recession. The ability of changes in the yield curve to be a leading indicator of future economic growth is demonstrated by the sharp drop and inverting of the spread prior to the 2008 recession.

The spread between the 10-year and 3-month Treasury bonds has risen by almost 100 basis points over the past few months. This dramatic steepening of the yield curve is a positive sign for stronger future economic growth, which could provide a catalyst for continued stock market gains.

This week’s chart looks at the CBO’s updated fiscal projections for the U.S. federal government published on May 14th (the red line on this chart is the updated deficit/GDP estimate). These projections are an update from the last set of projections made in February (gray line) and include the full effect of the tax increases implemented on January 1, 2013 and the budget cuts mandated by sequestration, which began on March 1st. These updated projections show a $642 billion drop in the expected federal budget deficit in 2013, and over a $6 trillion reduction in the expected deficit over the next decade. The bars on this chart show the projected improvement in the deficit (higher revenue or lower expenditures) compared to the previous projections. Interestingly, a large part of the improvement in 2013 is driven by payments to the U.S. Treasury from Fannie Mae and Freddie Mac, which have recently returned to profitability after being taken over by the federal government during the credit crisis. While the deficit-to-GDP ratio is now expected to shrink substantially over the next few years, the CBO projections still show the U.S. federal government running a structural deficit of 3%-4% of GDP indefinitely. This is because the recent improvement in the deficit has been driven by a cyclical recovery in the U.S. economy and fiscal austerity, but the long term problem of entitlements remains unsolved. These updated projections are clearly good news for the economy and the market in the near term, but until the long term structural deficits are addressed, investors are unlikely to view the U.S. as back to full fiscal health.

This week’s Chart of the Week focuses on debt levels of the U.S. consumer and federal government. For consumer debt, all forms of debt other than mortgages are included in the analysis. As of the fourth quarter of 2012, U.S. consumers collectively held debt of $2.8T. Over the 32 year time frame since 1981 (when data was first collected), consumer debt has increased from $378B to $2.8T, a whopping increase of 635%. However, this still constitutes a relatively small percentage of U.S. debt, and has hovered between 5 and 10% over the years.

On the other hand, federal debt has not only been a much higher dollar amount (not surprising), but has also been a much more volatile component of overall U.S. debt. As of the fourth quarter of 2012, the Federal Government’s debt was $11.6T. In the 32 year time frame, Federal debt has increased from $821B to $11.6T, an even larger jump of 1313%. Federal debt has averaged 22% of total U.S. debt ranging from a low of 16% to a high of 29%.

The chart above depicts these four debt data points: households’ consumer credit dollar amount, Federal government’s dollar amount, consumer debt percentage of total U.S. debt, and Federal debt percentage of total U.S. debt. The takeaways are quite evident. The Federal debt has increased significantly since the 3rd quarter of 2008 (onset of the Global Financial Crisis), and appears to be maintaining this trajectory. On the other hand, while consumers’ household debt has increased in absolute terms, there have not been dramatic spikes in the debt level. Additionally, it has maintained its weight in the overall debt picture. Given the disparity in both dollar amount and share of overall debt, the level (and trend) of federal debt will continue to have a much more notable impact on the economy and financial markets than consumer debt.

This week’s chart looks at current U.S. Syndicated Loan Underwriting Volume in comparison with the new business environment created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd Frank was enacted by President Obama in 2009 – 2010 with stated objectives of increasing financial accountability and transparency, ending “too big to fail” institutions requiring corporate bailouts, and protecting consumers. However, the ability of the Act’s provisions to accomplish these goals has been the subject of fierce debate. Amidst many new regulations imposed on the Financial Services Industry, Dodd-Frank restricts the types of proprietary trading activities that financial institutions are allowed to practice. This restriction comprises part of what is known as “The Volcker Rule”, which was implemented on July 21, 2012.

One of the major criticisms of the Volcker Rule has been one voiced by Canadian, British, and Japanese government finance ministers and bankers. These countries say the Volcker Rule is a disincentive for their banks to transact with their American counterparts because the Volcker Rule exempts U.S. government securities from its restrictions on proprietary trading but leaves similarly-rated foreign institutions out of the exclusion. Volcker Rule proprietary trading prohibitions would thus apply even if a transaction were between foreign parties wherein an American bank is involved only in an ancillary (ex. clearinghouse) capacity. Under this theory, in order to avoid this interference, foreign banks may avoid syndicating with U.S. banks.

Given that as of 1Q2013, North American deals constitute 82.1% of all Global Syndicated Loans¹, the number of domestically-originated syndicated loans which receive financing should be significantly affected if these doomsayers’ warnings ring true. However, per this week’s chart, over three quarters have passed since the Volcker Rule has become effective, and U.S. Syndicated Loan Underwriting Volume has recovered to pre-subprime crisis levels. Thus, while Dodd Frank and Volcker will continue to be scrutinized along other lines, it would seem that the hypothesized downward pressure on syndicated deals has been much to do about nothing.

¹Bloomberg

This week’s chart illustrates recent shifts in the personal savings rate and household net worth. As seen in the graph, household wealth is approaching its pre-recession level as the recovery in the stock and housing markets has helped repair household finances. The Federal Reserve’s tactics of holding interest rates low and offering stimulus in the form of Treasury and mortgage purchases seem to be creating its intended wealth effect, albeit slower than anticipated.

As household finances improve, consumers will be less inclined to save and more likely to purchase goods and services. Currently, the personal savings rate is hovering around 2.5% which is substantially less than its recession high of 6%. If the current rallies in the stock and housing markets continue, we should see a trickledown effect to many sectors of the economy, most notably jobs. In theory, an increase in consumer demand should lead to an increase in labor demand as companies ramp up production in response to more consumer spending. Additionally, labor demand will increase wages, further perpetuating the wealth effect.

This week’s Chart of the Week shows projected trends for non-agriculture employment in the U.S. by major industry sectors over the 2010-2020 timeframe. Every two years, the Bureau of Labor Statistics (BLS) estimates labor force trends over a 10-year period. BLS employment estimates are based on projected changes in both population growth and labor force participation rates within U.S. demographic groups.

Notable employment changes during this time include health care and social assistance (5.6 Mil), professional and business services (3.8 Mil), and construction (1.8 Mil). Nearly half of the projected job growth during 2010-2020 is expected to come from health care / social assistance and professional and business services. Despite strong projected growth in the construction industry, employment is not expected to reach pre-recession levels. Federal government employment is expected to lose approximately 370K jobs with nearly half of those reductions coming from the Postal Service.

The latest release, from February 2012, reflects key demographic changes taking place in the U.S. over the next 10 years. A slower rate of growth within the U.S. population, the continued aging of the baby-boom generation, and decreases in labor force participation rates are expected. These changes will have an effect on both the rate of growth within the U.S. economy as well as which industries will be the driving force of that growth.