Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
Today, we have the latest on consumer spending and mortgage rates. Welcome to yet another good news-bad news edition of The Line.
Retail Sales Much Higher than Expected in September
Add another bit of economic data to the ever-growing "better than expected" list. Retail sales rose 0.7% last month, easily trouncing the 0.3% Dow Jones estimate. The increase in sales was fueled by non-store retailers (+1.1%), auto and parts dealers (+1.0%), and restaurants and bars (0.9%).
Retail sales are up 3.8% over the past year, which is just above the 3.7% increase in prices during that time. Since retail sales are not adjusted for inflation, that means that consumers are paying 3.8% more than a year ago for slightly more stuff.
The $64,000 question remains, "how can consumers keep spending after the highest inflation in 40 years?" Two recent articles may give us some answers to that question. In short, they are:
- Americans 65 and older now account for a record 22% of spending.
- More than any other country, the U.S. has spent the "excess savings" that had built up during the pandemic.
The first point makes a lot of sense, since people 65 and older tend to have very little debt and lots of savings. This means they are not concerned about the recent spike in interest rates, as they can pay cash for their purchases. Seniors hold roughly one-quarter of household wealth, are more active than ever, and ready to spend. That’s all good news for the economy.
The second point comes from two economists at the New York Fed. In an effort to explain why economic growth in the U.S. has been stronger than other high-income economies recently, the authors looked at savings rates. While the savings rate in the U.S. has fallen below its pre-pandemic level, in other major economies it remains above the pre-pandemic level.
That means that to keep spending, Americans have used their "excess savings" built up during the pandemic, while other countries have not. That’s been good for the U.S. economy, as consumer spending accounts for about 70% of GDP. This has helped our economy recover faster than other countries, but it does raise a bit of concern.
The San Francisco Fed estimated that out of the $2.1 trillion in excess savings accumulated during the pandemic, only about $190 million was left in June, and would be all gone by the end of the third quarter of 2023. Since 3Q23 is over that is concerning, especially as credit card debt already sits at a record of over $1 billion.
While the prospects for future retail sales are concerning, their strong performance last month was quick to bring long-term borrowing rates up. That leads us to our next item.
30-Year Mortgage Rates Reach 8% for the First Time Since 2000
I must admit I never thought it would happen, but according to Mortgage News Daily the average 30-year rate hit 8% Wednesday for the first time in 23 years. This is certainly bad news for an already sluggish housing market. Sales of existing homes this year are already expected to be at their lowest level since 2011, and this news certainly doesn’t change that prediction.
When will it end you ask? Unfortunately, not until the data on consumer spending and hiring gets weaker. The Atlanta Fed’s most recent estimate of economic growth during 3Q23 is currently at 5.4%. That tells us we have a long way to go before we can expect any real decline in long-term mortgage rates.