September Market Commentary from Vanguard & Co.

Consumer spending engine is in gear

Consumer spending habits featured prominently in this week’s relatively short list of economic reports. The news was encouraging for the overall growth of the economy during the third quarter, as both consumer credit and retail sales advanced.

For the week ended September 12, 2014, the S&P 500 Index fell 1.1% to 1,986 (for a year-to-date total return—including price change plus dividends—of about 9%). The yield on the 10-year U.S. Treasury note rose 16 basis points to 2.62% (for a year-to-date decrease of 42 basis points).

Credit card borrowings pick up

Consumer credit, excluding mortgages, rose $26.0 billion in July to a total of $3.24 trillion, according to Federal Reserve data. The higher-than-expected annualized growth rate of nearly 10% from June was the largest in three years and indicates stronger consumer spending, which accounts for more than two-thirds of the U.S. economy.

Purchases of big-ticket items such as automobiles continued to represent most of the increase. However, there was a notable rise in credit card (revolving) debt, which advanced more than $5 billion. For the first time since before the Great Recession, revolving balances have grown for five consecutive months as more confident consumers loosen their grip on their wallets.

Retail sales advance

Retail sales for August increased 0.6% from upwardly revised July results, in line with expectations. The Commerce Department reported that August sales rose 5.0% from a year ago; this represented the largest comparable-month increase in more than a year. Auto sales, which had slumped in July, drove the increase. Excluding motor vehicles and parts, August sales increased 0.3% from July and 4.1% from a year ago. Miscellaneous retailers reported 2.5% higher sales in August compared with July, but department store sales decreased—as did gas station sales, thanks to the good news of lower prices at the pump.

“Reasonable increases in the use of credit and broad pickups in retail sales bode well for third-quarter gross domestic product. Our expectation for second-half growth of around 3% annualized seems on track,” said Vanguard economic analyst Andrew J. Patterson.

The economic week ahead

A fuller slate of economic reports is scheduled for release next week, including industrial production, producer and consumer prices, the Federal Open Market Committee’s monetary policy statement, new residential construction, and the Conference Board’s leading indicators.