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U.S. household debt drops and retails sales grows amidst higher taxes

Mar 22 2013

English: World GDP growth rate and GDP growth ...

English: World GDP growth rate and GDP growth rate of total OECD countries. Data source: World Bank Group and OECD. (Photo credit: Wikipedia)

U.S. household debt drops and retails sales grows amidst higher taxes

There is good news for all the retailers in the country since both the sequestration and the tax hikes along with rising fuel prices have failed to stunt the growth in retail sales across the board. As per the latest news update, total retail sales have jumped up by an annual rate of 1.1% in the month of February 2013. In addition, consumers are found to be bold enough to buy increasing number of cars amidst rising taxes.

The reason for this growth in consumer spending is that overall U.S household debt service-ratio has dropped to 10.38%, as per the data released by the Federal Reserve of New York. This ratio measures the amount of disposable income an individual spends to meet his/her debt obligations. Due to a significant drop in the household debt that was near to the ground in fourth quarter of 2012, financial health of the consumers has improved. This lent the necessary support to increase retail sales in the country and help the economy to stand back on its feet.

Moreover, the Fed tried its best to lower the borrowing costs of the consumers by buying bonds worth around $2.5 trillion since December 2008. However, these people had incurred huge amount of debt during the housing bubble period and that they could manage to wriggle out of the clutches of debt by scaling down their expenses and building up on emergency funds. Many of these consumers were forced to take up various debt relief programs like debt consolidation in order to straighten up their finances.

The retail sales growth news is all the more welcoming when the galloping prices of fuels like gasoline are taken into consideration. Consumer expenditures too have risen over the past few months. As a result, it now stands at 0.6% that excludes the costs incurred to buy cars and fuels.
According to the chief economist of IHS Global Insight Mr. Nigel Gault, the news regarding the amount of money spent on gasoline by the consumers was deceptive. However, the figure shows a strong market feature after deducting the fuel expenses. He further added that the figure indicates a resurgent private sector.

As per the report published by the Census Bureau, economists had predicted a sales growth of only 0.2% for February 2013, after arriving at a conclusion of the previous month’s (January) adjusted gain of just 0.1%. However, all these predictions were negated when the retail sales of volatile products like gasoline and autos found to have shot up much higher than expected. So, as of now the core retail sales of these products is said to be hovering somewhere around 0.6%.

These market data are in a way soothing for the common mass. This is because good sales data ensures greater optimism regarding the local economy. The figure will boost consumer sentiments since the federal government has executed higher payroll taxes on the working professionals and hiked the income tax rates on its high net-worth individuals or HNIs.

However, the current retail sales figure is still comparatively lower as compared to the sales record of the same time in 2012, which was higher by more or less 4.6%. At that time, the federal government noticed robust gain in the cyclical industries that comprises of real estate development materials and automobiles. This part of the economy is considered to be quite sensitive to the macro-economic factors that happen in the country from time to time.

It should be noted that discretionary costs like restaurant bills and home interior purchases have dropped considerably in the recent months. These economic reports were good enough to convince large financial institutions like Barclays to hike their 1st quarter economic development estimates from 1.9% to 2.2%. Previously, when the payroll tax hike policies came into effect, economists predicted that the year-over-year rate of growth in the consumer spending will drop by 1 percentage point, thereby reducing the growth expectation of consumer purchases by almost half.

However, once the retail sales report came in and the housing market started to crawl back to normalcy, consumers have become all the more optimistic with the economy and so, they’ve increased their spending.

The increased level of optimism in consumer spending has been attributed to better employment opportunities and reducing consumer financial obligations. This is because rate of unemployment in the country has dropped from an erstwhile 7.9% in 2009 to the current 7.7% in February 2013. A sound 236,000 non-agricultural jobs were generated across the country.

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