How is the American consumer doing?
Because the American consumer is one of the most important components of the American economy. You have heard me say many times on this show that consumer spending is responsible for 70 percent of GDP. (Gross Domestic Product). Where the American consumers go, the economy tends to follow. Over the past two weeks, a number of figures have come out that provide some important insights.
Let’s start with the most important number: consumer spending. What is that telling us?
Judging by retail sales, consumers continue to rein in their spending habits. On Friday, we learned that Americans had slowed their spending in June, the third time we have seen that happen this year. According to the Commerce Department, retail sales dropped in June for the second straight month, down 0.2% compared to May. And we cannot blame one factor, like weak auto sales, because consumers spent less across the board in June. Sales dropped at gas stations, grocery stores, department stores, restaurants and bars.
Are consumers losing confidence? What is behind the spending slowdown?
Consumer confidence has declined a little bit. The University of Michigan found that U.S. consumer sentiment fell to 93.1, below the 95 level economists had predicted in July. The monthly survey consumers’ attitudes toward topics such as personal finances, inflation, unemployment, government policies and interest rates. Interestingly, another measure of confidence – consumer sentiment – which measures how people feel about the overall economy and their personal finances, hit a high not seen since 2005.
In my mind, there are two main factors at play here that are causing sales to fall. First, while people are feeling confident in their personal situation, they are not seeing wage growth. The economy continues to see strong job growth 8 years after we hit bottom in the recession, but wages continue to chug along at 2.5%, which is nowhere close to the growth rates in past recoveries.
And the second factor?
The overall uncertainty emanating out of Washington. Many Americans’ confidence in the economy’s future spiked in the wake of Trump’s election, believing they would see higher growth rates – he promised 3 percent growth on the campaign trail – and tax cuts that would help them. But with the prospects for any action in Washington being put on the backburner in light of the constant stream of missteps and scandal coming from the White House, Americans are moderating their outlooks and tightening their hold on their dollars.
What does all of this mean for the economy? Do we expect a downturn soon?
I do not foresee a downturn or a recession in the short-term. Slowing consumer spending will certainly add to the woes of some struggling retailers, like department stores and those in malls, but the broader economy will continue to grow at its slow and steady pace. These latest numbers, coupled with slow inflation, will give the federal reserve something to contemplate regarding the timing of their next rate raise, so lower interest rates may persist longer than expected. All due to the power of the american consumer!
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