A line from the 1970 hit single by The Band lamented “oh, you don’t know the shape I’m in”. In late 2007 it wouldn’t have been surprising to hear that comment mumbled from the mouths of a wide swath of US consumers who were straining under the weight of historically high debt service levels. Not surprisingly, the US consumer, so important to the growth of our economy, was incapable of staunching a whopper of a recession made all the worse by over levered bank balance sheets. In this quarterly report we will assess the current state of the consumer by exploring a few key market indicators.
The health and outlook of the consumer is inextricably tied to labor market conditions. The October unemployment rate sat at 4.1%, essentially full employment, and TTM average First Time Jobless Claims approximated 245K, falling within the range typically associated with a growing economy, as shown below:
However, not everything in the labor market is roses and chocolate. Most notably, the tepid pace of wage increases are only marginally outpacing inflation (as measured by the CPI) and the labor participation rate remains a stubbornly low 62.7%, down from pre-recession levels of ~67%. In summary, I would have to grade the labor environment a solid B, perhaps a B+.
In addition to a solid labor market, household balance sheets have been positively impacted by rebounding home values and a buoyant stock market resulting in a 42% increase in household net worth over the prior five years. Encouragingly, debt service payments, inclusive of mortgage and consumer debt, as a % of disposable income have dropped below 10%. Clearly, borrowers are benefitting from the persistently low interest rate environment but have also paid down personal debt to sustainable levels. The following chart, details rising household net worth against a backdrop of declining debt service levels.
Like the labor market, the complexion of the US consumer is not without an irritating pimple or two. The Personal Savings Rate is a relatively low 3.4% and total household debt reached new highs in Q3 2017, rising $116 billion to total $12.96 trillion, $280 billion above the previous 2008 high. Thus, any precipitous increase in interest rates, or corresponding collapse in asset values, could squeeze consumer spending and derail the economy. In spite of the foregoing, it is our opinion the US consumer is in solid financial shape and should be able to provide adequate economic fuel to make the chances of recession unlikely in 2018.
MCM Capital is a lower middle market private equity firm focused on acquiring niche manufacturing and value added distribution businesses generating $15 million to $75 million in annual revenues.