Future of U.S. Growth on Consumers’ Shoulders in Replay of 2015

(Bloomberg) -- They’ve carried the world’s largest economy through a tough patch before. History suggests American consumers could do it again.

Friday’s report on U.S. growth underscored how much the expansion -- which this month became the longest on record -- now largely relies on Americans staying happy and spending, while global weakness and President Donald Trump’s tariffs eat away at contributions from business investment.

It’s a replay of 2015 and 2016, when an oil-led slowdown in manufacturing put shoppers in the same spotlight. At the time, consumers kept the expansion rolling thanks to a robust labor market that’s only tightened since then.

The question is whether they can sustain it now, as the U.S.-China trade war could further curb business investment, potentially spilling over from manufacturing to service producers that make up the majority of the economy and labor market. The grounding of Boeing Co.’s 737 Max jet and lower oil prices that hit producers are also weighing on company spending.

Economists and investors expect Federal Reserve policy makers to cut interest rates next week to guard against risks. One positive sign: wages and salaries rose in the first half at the fastest rate since 2007, and the saving rate remains relatively high, providing plenty of fodder for consumers, whose spending accounts for about two-thirds of the economy.

“The thing you’d like to see is a balanced growth profile, where the economy is standing on three solid legs -- consumer, businesses, and government spending,” said Brett Ryan, senior U.S. economist at Deutsche Bank AG. “The onus is on the consumer to keep things going at this point.”

The Commerce Department data Friday showed gross domestic product expanded at a 2.1% annualized rate in the April-June period, topping forecasts for 1.8%. Still, that was down from 3.1% in first quarter.

Consumer spending, the biggest part of the economy, increased 4.3%, while government spending climbed 5% and offered the biggest boost in a decade. Nonresidential investment fell 0.6% for the first drop since 2015 and residential decreased for a sixth straight period.

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There are some signs consumers will lead the way. McDonald’s Corp. grew at a blistering pace in the latest quarter, with same-store sales bolstered by a jump in its home market, the company’s earnings report showed Friday. Starbucks Corp. on Thursday said U.S. comparable-store sales soared from a year earlier.

Other indications that the consumer is in good shape: Sentiment is near historical highs, and retail sales have advanced for four straight months, the longest streak since early 2018.

It’s reminiscent of the 2015 growth picture, when Americans came through to save the expansion. Corporate profits had dropped for the first time in seven years, while consumption kept humming at a solid pace.

Friday’s report “shows we are not seeing shocks to the U.S. consumer,” Denise Chisholm, a strategist at Fidelity Management, said in a Bloomberg Television interview. “It’s positive from the framework of, we may see a prolonged expansion cycle continue.”

Other data have highlighted the cooler pace of growth, with manufacturing figures showing tepid conditions and bellwether Caterpillar Inc. reporting a lackluster second quarter. A measure of U.S. production has declined in consecutive quarters, the common definition of recession, while a gauge of global factory activity contracted in May and June.

Trump targets growth of about 3%. Economists have seen the pace remaining under 2% through at least the end of next year -- though unlikely to get much worse.

“We have pockets of weakness in manufacturing, business investment, but as the consumer goes, so does the U.S. economy -- the fundamentals for the consumer are very, very good,” said Ryan Sweet, an economist at Moody’s Analytics Inc. “Unless the consumer starts to hunker it in, I think the U.S. economy is going to get through this little soft patch.”

--With assistance from Kristy Scheuble, Sophie Caronello, Ryan Haar and Vince Golle.

To contact the reporters on this story: Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net;Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Jeff Kearns

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