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Last week, investors digested the latest round of mixed economic data about the U.S. economy. While housing numbers came in strong, the disappointing June retail sales report showed that consumer activity remains soft.
The mixed data illustrate a basic contradiction for 2015: Despite continued improvement in the labor market and lower gasoline prices, consumers aren’t responding with open wallets. At 1.4 percent year-over-year, adjusted retail sales growth is close to its lowest level since 2009.
This begs the question: With the U.S. economy showing signs of life, why aren’t U.S. consumers spending? As I write in my new weekly commentary, “Markets Show Life While Consumers Hold Back,” there are a couple key factors holding the consumer back.
Muted wage growth
Higher wages are the single biggest driver of consumption growth, yet signs of wage improvement remain mixed. Looking forward, even assuming wage growth does start to accelerate, consumers are unlikely to revert to their old spending habits any time soon. The reason: The multi-decade debt binge, which supported household consumption prior to the financial crisis, has now come to an end.
The household debt binge is over
Between 1945 and 2007, household debt grew at an average annualized rate of over nine percent, much faster than nominal income growth. This trend, which eventually hit a wall in 2007, represented a huge tailwind for household spending. Historically, household consumption has increased by roughly 0.2 percent for every one percentage point increase in household debt.