2015: The year of the consumer

After several years of intently watching the Fed for clues as to the economy, the markets and interest rates, 2015 will be the year that we can finally take our eyes off the Fed, and focus on the consumer.

Think this year won’t be about the consumer? Think again. The markets easily weathered the withdrawal of quantitative easing, and they no longer seem to be reacting to speculation over when the Fed will start tightening. On the other hand, two pieces of economic data were released in early January that were key to gauging consumer activity: the average hourly earnings component of the December jobs report, and advance retail sales for December, a critical month for retailers.

Both numbers missed expectations, and the market reaction to both releases was severe. Equities sold off about one percent the day that average hourly earnings reportedly fell 0.2% in December, and they sold off another percent a few days later when retail sales reportedly declined 0.9% in December – a critical month for retailers. Clearly, markets are focused on the consumer as the new year unfolds; you should be, too, as consumption will drive loan and savings growth trends in 2015. And we believe the consumer is coming out of hibernation this year.

Before we explain why, let’s look at those two seemingly pessimistic data releases more closely. The hourly earnings figure defies logic; payroll growth averaged nearly 250,000 jobs a month in 2014, the best year since 1999. Unemployment fell from 6.7% in December 2013 to 5.6% a year later, the lowest rate since 2008. And while underemployment remained elevated, it also fell last year to the lowest level since 2008. Thus we’d expect hourly earnings to rise.

Indeed they did, for most of 2014; in fact, December’s was the first monthly decline since October 2012. Annual earnings growth averaged 2.0% last year – not stellar, but positive, and above the inflation rate. Several theories have been postulated to explain the December decline: more highly-paid workers retiring and new hires entering the labor force at lower wages, and the addition of large numbers of seasonal retail workers in December at lower wages being chief among them.

Our view is that the data may well prove to be an anomaly. One month doth not a trend make, as we saw when earnings declined in October 2012 only to be followed by 25 consecutive monthly gains. And, while year-over-year wage growth slipped to 1.7% in December, the average workweek expanded during 2014. If we multiply hourly earnings times hours worked, actual earnings were up more than 2.5% in 2014 – again not stellar, but well above the inflation rate.

As for retail sales, that could also prove anomalous; this was the advance release, with two revisions to follow. This number too defied logic, as all reports from retailers indicated stronger year-over-year sales for this holiday season. But another explanation is in the fact that this data is seasonally adjusted. On an unadjusted basis, sales rose 14% in December, vs. the reported 0.9% decline. The adjustment factors for each month are relatively static, but the months themselves are not. In this case, the November and December adjustments failed to consider the fact that November only had two shopping days after Black Friday in 2014, thus the December adjustment was overstated.

Regardless these two negative releases, we maintain that we’ll see a resurgent consumer in 2015. Household balance sheets are healthier than they’ve been in more than three decades. The labor situation – the biggest driver of most borrowing – should continue to improve. Credit card use is picking up, albeit with a healthy caution. Auto sales remain strong, near pre-recession levels. And let’s not forget that lower prices at the pump will amount to an estimated $100-125 billion windfall for households this year.

We also believe that 2015 will be a breakout year for housing, due to the confluence of several factors: mortgage rates near record lows, but expected to rise; the introduction of 3%-down payment loans by Fannie and Freddie, and the 50 basis point reduction in the FHA mortgage insurance premium; slightly elevated supply; and a moderation of prices over the past year.

In looking at these trends, credit unions should find opportunities to grow credit cards, auto loans and mortgages in 2015. (Consider selling long-term mortgages to avoid a concentration in loans at low fixed rates in the face of rising rates to come.) Savings growth will likely slow, so liquidity management will be important. But overall, this should be a solid year for credit unions.

To receive The Rochdale Group’s full 1Q15 Economic Outlook, contact the author at bhague@rochdalegroup.com.

Brian Hague

Brian Hague

Brian has more than 25 years’ experience in financial institutions and the capital markets, and has devoted 21 years to serving credit unions through various roles at CNBS, LLC, a ... Web: www.rochdaleparagon.com Details