A gap has surfaced between income and spending, with consumption now being supported by savings rather than income growth. Real spending grew 2.6 per cent over the year on the most recent print, while real disposable income excluding transfers only increased by 0.8 per cent. But this is not a new development. Spending has outgrown income in all months since the middle of 2024, and that gap has to be paid for somehow . . . savings. But savings are finite, and the longer income growth stays below spending growth, the less protection there is left when the skeletons come out of the closet.
When income ex-transfers has turned negative in the past, it has often been in or around a recession. That isn't necessarily proof of anything, but it isn't a reassuring takeaway either. This chart splits the price of a barrel of US diesel into two parts: the crude oil that goes into it, and what refiners charge to turn that crude into diesel. Together, they make up the price at the pump before tax and distribution. Oil supply concerns have been top of mind for investors throughout most of this year, but a bottleneck in refining capacity may be the bigger concern. The refining premium has roughly quadrupled this year, and sits well above the period when Russia first invaded Ukraine. The cost has been felt by the consumer, with US pump prices passing $6 per gallon. That causes both economic and political difficulties. Diesel is what moves goods, runs farms and powers machinery, so this could matter more for inflation than the oil price alone suggests.
Even if a resolution to the Iran war brings down oil prices, might a persistently higher refining cost become a more entrenched concern for inflation and the broader economy? The US housing market has become a bit of a ghost town. Existing home sales as a percentage of owner-occupied homes are running at 4.75 per cent, below the post crisis low of 5.1 per cent in 2010 and about half the 9.6 per cent reached in 2005. This is a story of limited appetite to move, as most homeowners are locked into long-term mortgages at Covid-level suppressed interest rates. Moving would mean taking on a mortgage at a much higher rate, ultimately limiting turnover across the board. As a result, the housing market appears to be stuck in a bit of a rut, and this has a feed-through into fewer dollars being spent on anything from real estate lawyers to sofas.
Scary stuff for those associated with the industry or optimistic about broad-based economic growth. This won't shock any Alphaville readers, but credit spreads are tight. Very tight. Extremely tight. The reasons for that are heavily debated, but it's quite interesting to look at the realised excess return for credit (vs governments) at similar periods in the past where the credit spread contributed so little to the overall corporate bond yield. For the US investment-grade bond index, credit spreads now make up about 14 per cent of the yield, the lowest proportion since 1998. Starting points like this have historically been followed by weak or negative excess returns.
Source: Financial Times Markets · Summarized by HeadlinesBriefing