Consumer Credit Grows Record 8.5% in August

This month’s Federal Reserve consumer credit release showed that household borrowing had grown at a seasonally adjusted rate of 8.5% in August, the fastest rate in a year, up from 5.9% in July. The surge represented a $25.9 billion rise in total consumer spending to $3.69 trillion, and occurred as demand for everything from cars to education and credit cards picked up.

Revolving credit grew at an annual rate of 7% to $974.6 billion, while non-revolving credit rose 9%, or $20.2 billion, to total $2.71 trillion. Federal government holdings of student loans comprise the greatest share of non-revolving credit, representing a 38% portion of outstanding credit, while depository institutions and financial companies are the second and third largest, respectively.

Greater willingness to borrow on the part of American consumers, with decent consumer balance sheets, points to confidence about future earnings, driven by steady income and job growth. Indeed, the economy added 156,000 new jobs in September, posting another month of steady gains, although the figure was slightly lower than previously forecast. Unemployment grew slightly from 4.9% to 5% as more discouraged workers re-entered the market looking for work, though overall, unemployment claims remained at 40-year lows. Wages also increased 2.6% in September, compared to a year ago, overtaking the inflation rate.

“It turns out that Goldilocks is real: The labor market is not too hot and not too cold,” says Douglas Holtz-Eakin, a former director of the Congressional Budget Office, according to CNN Money.

In combination, job growth, income growth, and increased household borrowing, all suggest that the consumer discretionary sector, including retailers, car manufacturers, and other domestically-oriented consumer industries, may be poised for a moderate recovery. The increases in the stock prices of GM, Ford, and Gap, also support this view.


U.S. Consumer Spending Slows in August, Along With Income Growth

U.S. consumer spending in August slowed to the lowest rate in five months, with income, wage, and salary growth also slowing after four strong months. Adjusted for inflation, purchases fell 0.1 percent in August, following 0.3 percent growth in July. Bloomberg notes that while the slowdown is no cause for panic, given that consumer purchases are the engine driving the American economy, their ups and downs are worth following.

Consumption advanced a respectable 0.4 percent in July and 0.3 percent in June, according to the Commerce Department, and remained unchanged, for the first time since January, during the month of August. Early indications of the drop in real spending could be seen in slowing retail sales and flagging demand automobiles.

Personal incomes also grew just 0.2 percent in August, compared to 0.4 percent in July, marking the weakest income growth since February’s 0.1 percent drop. Wages and salaries increased just 0.1 percent in August after back to back months of 0.5 percent growth. Disposable income, or spending money left after taxes, experienced soft growth of 0.1% in August as well.

“It’s not the worst thing ever,” said Tom Simons, a money-market economist for Jefferies LLC to Bloomberg. “The consumer should come off the sidelines a bit more in coming months. Third-quarter consumer spending should be a little more moderate but still strong, reflecting a solid, healthy base.”

On the other hand, an uptick in hiring, cheaper gasoline prices and groceries, low-interest loans and consumer optimism suggest that consumption will deliver moderate, but healthy contributions to economic growth in the coming quarter. Economists are banking on consumption to lift the GDP growth rate to 3 percent in the current July-September performance.

While consumer confidence grew in September, that reading was at odds with the higher 5.7 percent savings rate that Americans charted in August, as higher savings usually indicate consumer anxiety and a conservative outlook on economic prospects.


Tempur Sealy Shares Plunge Following Lower 2016 Sales Guidance

Shares of Tempur Sealy International plummeted by 22% to $57.60 following the dismal sales guidance issued by the company, informing investors to expect a 1% to 3% decrease in net sales for 2016 compared to last year. Tempur Sealy also put its revised EBITDA at between $500 million and $525 million, down from the EBITDA guidance of $525 million to $550 million that it issued earlier this year in July.

“While our net sales are below expectations, our operational initiatives are going well and are continuing to drive considerable margin expansion,” Chief Executive Officer Scott Thompson said in a press release. “We currently expect net sales for the full year to be down 1 to 3 percent as compared to 2015.” Thompson, who was brought on board by activist investor H Partners Management LLC, has been aiming to cut costs and boost profit margins at the company in keeping with his mandate.

While Tempur Sealy has not been forthcoming with reasons for the decreased guidance, one likely culprit is the booming online market for mattress sales by e-retailers such as Casper and Tuft & Needle. These companies represent only $300 million, or 2% of the industry, but have captured 13% of non-innerspring mattress sales, and continue to increase market share rapidly.

Another factor put forth by The Wall Street Journal is that the rebranding efforts of Steinhoff International Holdings have had a detrimental effect on mattress sales. Steinhoff recently acquired Houston-based The Mattress Firm, the largest US specialty mattress retailer, and currently accounts for 25% of Tempur Sealy’s sales.

Tempur Sealy will release its third quarter results on October 27. According to USA Today, analysts surveyed by S&P’s Global Capital Intelligence forecast $834.5 million in revenue for the third quarter, down from $880 million in revenue that the company made during the same quarter in 2015. Analysts are also projecting $3.1 billion in revenue for the full year, down from $3.15 billion in revenue for 2015.


Oil Prices Surge Following OPEC Production Cap

Oil prices surged following news that the Organization of Petroleum Exporting Countries had agreed to cut production and cap output. The international oil benchmark Brent crude rose 6% to nearly $49 a barrel on the back of the announcement.

November West Texas Intermediate crude futures jumped 4.7%, or $2.11, to trade at $46.78 a barrel. US stocks also closed higher overall following the surge in oil prices, with the Dow Jones Industrial Average closing up 110.94 points, ExxonMobil Corp. shares jumping 4.40%. Moreover, the S&P 500 index finished up 11.44 points, or 0.5%, at 2,171.37, while the energy sector jumped 4.3%. Oil prices settled up 5.3% at $47.05 on Wednesday.

The energy ministers from the major oil exporting nations struck the deal during talks held in Algeria in order to limit crude production and reduce the oversupply. The formal details of the agreement will be finalized at the OPEC meeting in November.

The deal stipulates a 700,000 barrel reduction of oil output per day overall, though some OPEC nations will cut their production more than others. Iran, for instance, will be allowed to increase its output. Oil production will be limited to a range of 32.5 million to 33 million barrels per day, down from August’s output of 33.2 million barrels.
“Opec made an exceptional decision today,” Iran’s Oil Minister Bijan Zanganeh said, according to the BBC.

Goldman Sachs expressed skepticism that the deal would successfully limit oil production in the long term, in a note that the investment bank circulated to investors. Goldman said that it would not revise its forecasts for WTI at $43 per barrel by the end of this year and $53 a barrel in 2017.

“If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world,” Goldman’s analysts said.
Goldman also noted that “compliance to quotas is historically poor, especially when oil demand is not weak,” and that other oil exporting nations not beholden to the quota had increased oil production beyond analysts’ expectations.


The BIS Warns of Record-High Banking Stress in China

The Bank for International Settlements has recently released a quarterly report warning that China’s “credit to GDP gap” has reached a record 30.1%, indicating that the world’s second-largest economy faces mounting debt and credit pressures. According to the BIS, levels elevated beyond 10% signal high banking strain in an economy. In the United States, for instance, readings surpassed the 10% threshold in the lead-up to the financial recession.

The elevated credit to GDP gap suggests excessive credit growth in China and the possibility of a financial implosion. Should such an event occur, the repercussions would greatly damage the global economy. According to the Telegraph, “outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control.”

China’s total debt has reached 255% of GDP, having ballooned by 107% in the past eight years, and continues to grow, while corporate debt alone has hit 171% of GDP. Though China’s leadership has promised to limit debt growth, it has been hardpressed to follow through on its pledge given that debt has sustained the nation’s economic growth. Government spending on infrastructure and real estate has also proven to be less productive and failed to contribute meaningfully to GDP.

Some analysts have taken to prescribing bank recapitalization and reducing reflexive stimulus spending to artificially sustain growth on the part of the Chinese government. China’s central bank issued a statement earlier this year averring that investors would be able to maintain reasonably high levels of capital in the event of a serious banking shock. The fear, according to the Telegraph, is that a surge in capital outflows may force the central bank to sell off foreign currency to bolster the yuan, “automatically tightening monetary policy” and sparking a vicious cycle.

Significant doubts remain as to whether the government can extricate the nation from its precarious situation, though state control of the financial system may conversely prove to partly mitigate the risk of a banking crisis.