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Higher retail sales signal consumers are spending more, borrowing could follow suit

Aug 24, 2013 Philip Burgess

While consumers endured some strong headwinds in the beginning of the year - the fiscal cliff and higher income taxes - conditions have improved, which has helped boost spending.

One sign of this has been increasing retail sales, which jumped for the fourth consecutive month in July. According to the U.S. Department of Commerce, sales at retailers increased 0.2 percent, slightly lower than the projection of economists surveyed by Bloomberg. When spending picks up, borrowing activity typically follows suit, so short term lenders may want to prepare for an influx of demand in the near future.

Higher retail sales were fueled by employment gains and increasing household wealth as home values and stock prices rise.

"Consumers are still able to go out there and spend despite headwinds from tax increases and the sequester," Omar Sharif, U.S. economist at RBS Securities Inc, told Bloomberg. "Job growth is continuing at a moderate clip and we're making gradual headway."

Home prices lead to increased household wealth
Part of the reason many Americans have been able to spend more is improved household wealth, which is being fueled by rising home values, among other factors.

At the end of 2013, more than 100 forecasters said they expect the Zillow Home Value Index to be up an average of 6.7 percent year-over-year, according to the latest Zillow Home Price Expectations Survey. Home value appreciation is projected to continue to rise for the next four years as well.

"Short term expectations for home value appreciation through the end of this year are consistent with a nationwide housing market recovery that is both strengthening and widening, but still coping with high levels of negative equity, high demand and low inventory," said Zillow Senior Economist Dr. Svenja Gudell. "Combined, these factors will continue putting upward pressure on home values for the next few months."

Short term lending demand could rise with more spending
Generally, when spending levels pick up, borrowing activity follows suit, so short term lending demand could be one result of increasing consumer spending. This form of lending can be beneficial for people in numerous different ways despite recent criticisms. For example, when an unexpected expense arises, people may not have the funds to cover the cost. Short term lending can provide an out for these consumers so they don't have to fall short on any other essential expenses.