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Consumers Spending Stays Flat in April: A Bad Sign for Banks

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Consumer spending remains flat

According to the latest data from the US Department of Commerce released on June 1, 2015, PCE (personal consumption expenditure) in current dollars remained unchanged in April as compared to March. It rose by 0.5% in March, according to the revised numbers.

One of the main reasons for consumer spending remaining low in the first quarter of 2015 was the harsh winter. But the stagnation in consumer spending indicates that consumers aren’t very confident about the overall economy and are still cautious with their incomes.

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Savings rate increases

Personal income and disposable personal income each increased by less than 0.4% in April. Despite the higher income, consumers didn’t spend more. The savings rate increased to 5.6% in April from 5.2% in March. The savings rate is defined as personal savings expressed as a percentage of disposable personal income.

The above graph shows monthly personal consumption expenditures and savings since January 2014.

Lower spending hurts banks

Lower spending typically means lower credit card and other consumer loans, which hurts banks. Banks such as J.P. Morgan (JPM), Citigroup (C), Wells Fargo (WFC), and Capital One (COF) have significant consumer loan portfolios. Flat consumer spending isn’t a good sign for these banks.

Together, these four banks form ~22.5% of the Financial Select Sector SPDR Fund (XLF).

Over the longer term, higher spending indicates a generally growing economy. This leads to greater loan demand and increased capital market activity, which are positives for the banking sector.

This doesn’t mean that savings are always bad for the economy. Savings generally end up as deposits in a bank. The banks may lend this money to industries, helping economic growth along. Banks may also use savings to extend consumer credit. The general argument is that a sudden rise in savings and a decline in consumer spending hurts growth.

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