How U.S. Consumers Are Carrying Torch for Economy Beset by Risks
A shopper carries an umbrella while crossing the street near the Fulton Street Mall in the Brooklyn borough of New York, U.S. (Photographer: Victor J. Blue/Bloomberg)

How U.S. Consumers Are Carrying Torch for Economy Beset by Risks


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The big question hanging over the U.S. economy is increasingly this: How much longer can American consumers carry the day while businesses bear the brunt of a global slowdown and the trade war?

A jobless rate hovering near its lowest level since the Woodstock era, expanding incomes from wages and investments, and optimism about personal finances are helping make more tenable an outlook for sustained spending growth -- at least for the time being.

The clouds that have gathered over the business community could very well darken that outlook for the consumer. A government report on Friday showed cracks may be starting to form in what has been a bedrock for household spending -- the labor market. Also, more Americans have turned to credit to finance their purchases, a trend that has the potential of interrupting the recent solid-spending trend.

Households were the economy’s primary source of fuel in the second quarter, boosting spending at a supercharged annualized rate of 4.7%, the most in four years, according to the government’s latest reading on gross domestic product.

How U.S. Consumers Are Carrying Torch for Economy Beset by Risks

What’s more, monthly readings show third-quarter spending could be hefty as well, albeit not quite as robust as in the April-June period. The government’s July retail-sales data showed so-called control-group purchases -- which strip out some categories and are seen as a gauge of underlying demand -- rose by the most in four months. In the three months through July, they advanced an annualized 9.7%, close to the strongest pace since 2003.

Fed’s View

“The labor market is still tightening at the margin. By so many measures the labor market continues to strengthen. So the consumer is in good shape.”
-- Federal Reserve Chairman Jerome Powell, at event in Zurich on Friday.

Worker pay has been firm enough to keep the wheels of spending in motion. Monthly data from the Bureau of Economic Analysis show gains in total wages and salaries exceeding 5% on a year-over-year basis for the six months through July.

How U.S. Consumers Are Carrying Torch for Economy Beset by Risks

In addition, the Bloomberg consumer comfort gauge of personal finances is near its highest level in roughly two decades, thanks to a combination of steady pay growth and elevated stock prices.

How U.S. Consumers Are Carrying Torch for Economy Beset by Risks

For all the favorable developments feeding into the spending boom, there are plenty of reasons for caution. The primary concern in the economics community is that the weakening in economic growth from Europe to Asia, along with the turmoil sparked by tit-for-tat tariffs between Washington and Beijing, will eventually bleed over into Main Street USA.

U.S. manufacturing is already in recession and, while the rest of industry is still expanding at a moderate pace, the risk is that the weakness will become more widespread. The latest jobs report showed private employers added 96,000 jobs in August, the fewest in three months.

While job gains of that magnitude may be enough to hold down the unemployment rate, hiring has clearly decelerated this year, threatening to restrain wage and consumption growth. The three-month average for private payroll growth is 129,000 as of August, well below the 240,000 at the start of the year.

How U.S. Consumers Are Carrying Torch for Economy Beset by Risks

A more below-the-radar statistic that shows the risks of slowing consumer spending is debt -- more specifically, the type of debt households are using to finance their spending.

While Americans may have less housing-related debt than they did when the recession ended a decade ago, student loans and credit-card balances are much larger. Those typically carry higher debt-service costs. Interest rates on credit cards are now above 17%.

Weaker corporate earnings, on the heels of weaker business investment and growth concerns, could well exacerbate the developing softness in the labor market. Should pay gains moderate, consumers may have little choice but to rein in the spending that makes up about 70% of the economy.

How U.S. Consumers Are Carrying Torch for Economy Beset by Risks

For now, consumers are in the driver’s seat on growth. However, as Fed Chairman Jerome Powell noted Friday, there are “significant risks” associated with tepid global growth and trade policy uncertainty that must be navigated to ensure the longest-running economic expansion is sustained.

©2019 Bloomberg L.P.

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