Debt Ceiling Delayed As Economy Grinds To Halt

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The S&P 500 was up 0.91% in the month of April which helped it achieve year to date gains of 6.49%. These are impressive given the back drop of weak economic data. Another term for a resilient stock market is a bubble which increases on good and bad data.

Debt-Ceiling Deal

While the GOP controlled Congress is worrying about passing healthcare and tax reform, the immediate concern is averting a government shutdown. The GOP needs the Democrats to agree to raise the debt ceiling because it needs 60 Senate votes to pass it. Even though the GOP has 52 seats in the Senate, the Democrats hold strong negotiating power because the President’s approval rating is weak. That’s how the Democrats got the GOP to take funding for the border wall out of the deal.

The latest negotiations have led to the Republicans agreeing to fund Obamacare’s cost-sharing reduction payments to insurers to subsidize low-income healthcare plans. This was the main sticking point which had Democrats balking at agreeing to avert a shut down. Even though the latest deal that was made at the last minute only funds the government until May 5th, a longer-term deal is likely to be made now that the GOP gave in to the Democrats’ demands. This wasn’t a surprise because it makes political sense for the GOP to work on a new bill to lower healthcare costs instead of forcing the poor to pay higher premiums before solving the problem of spiking costs.

GDP Disappoints

Q1 GDP growth was expected by economists to be 1.0%, but it came in at 0.7% growth. This weakness was caused by the weakness in consumption growth. Consumption drives about 2/3rd of economic growth so small changes in the seasonally adjusted growth rate have big results on GDP growth. As you can see in the chart, consumption growth was 0.3%.

If Personal Consumption Expenditures grew at a normal rate, the economy would have grown 2%. Even though consumption disappointed, real disposable income grew 1.0% as wage costs increased 0.8% and benefits costs increased 0.7%.

The question remains where the extra disposable income went if it didn’t go to increased spending. The answer is it went to increased savings and servicing the excessive debt the consumer has already racked up since the financial crisis. Personal saving was $814.2 billion in Q1 which was up from $778.9 billion in Q4. Personal savings as percentage of disposable income increased from 5.5% in Q4 to 5.7% in Q1. This small increase in savings is directly in contrast to the high consumer sentiment numbers which tells us consumer sentiment is a meaningless statistic.

The consumer will have to save much more if it wants to come close to making up for the large debt it has accrued this cycle which has been accentuated by low interest rates. The consumer is in bad shape, as you can see from the chart below.

It shows Capital One’s credit loss provisions for its credit card unit. This is the money it sets aside to make up for defaults. The money it has set aside increases to $1.717 billion in Q1 2017. This is the highest amount of credit loss provisions since Q4 2008 which had $2.1645 billion. The credit card loan bubble is only one facet of the debt bubble. The two other parts are auto loans and student loans. Each portion feeds off the others since when a consumer is drowning in student loans, it makes it tougher to pay off the other loans it accrued.




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