Consumers cannot carry the US economy for ever

Consumers cannot carry the US economy for ever

They don’t call us dismal scientists for nothing. Nearly 75 per cent of economists surveyed in July by the National Association for Business Economics see a US recession by the end of 2021. But ask for data supporting that forecast and you get no real consensus. There are plenty of theories about trade wars. US growth has slowed. But the usual bubbles and imbalances that trigger recession aren’t yet evident. With consumption accounting for nearly 70 per cent of growth, a recession has to be transmitted through the US consumer. The main question is when. The good news so far is that Americans remain robust spenders. Consumption grew by 4.7 per cent annualised in the second quarter, the fastest pace in four years. Retail sales have also been strong, with core sales (stripping out volatile categories) accelerating between May and July at the fastest pace in more than 15 years. The Bloomberg consumer comfort gauge of personal finances, factoring in pay growth and equity prices, is near a two-decade high.Payroll gains have broadly slowed this year, averaging 145,000 jobs a month compared with 215,000 last year. That is the weakest pace since 2010. Given an unemployment rate of only 3.7 per cent, though, that is hardly cause to call in the cavalry. Wage growth remained robust at 3.2 per cent year-on-year in August, the labour force participation rate actually rose and two early warning indicators for the jobs market — hiring for temporary positions and weekly working hours — strengthened.According to Federal Reserve economist Claudia Sahm’s Recession Indicator, the employment data raises virtually no red flags about a downturn over the next two years. What’s scary, however, is that as New York Fed President John Williams says, “The consumer is now carrying all of the weight, or much of the weight, for growth going forward.” Other regional Fed presidents tell me that local chief executives report uncertainty around trade delaying investment and spending. They see vulnerabilities from a further escalation in trade tensions prompting cutbacks and lay-offs. Manufacturing — heavily exposed to trade risks — has seen a pronounced hiring slowdown. The data suggests we are already in a manufacturing recession. Higher input costs from tariffs may also reduce profits enough that companies take on fewer staff. Earnings for companies in the S&P 500 fell in the first half of this year. Most analysts expect further deterioration. Americans might also cut spending if equity markets face a sustained correction. Falling profits and the same headlines and tweets that dent CEO confidence could also spook investors. As equity markets roll over, stockholders may worry their wealth is evaporating and rein in spending. Because the wealthiest 10 per cent of households hold around 85 per cent of all stocks owned by Americans, a market correction may not on its own cause a contraction, but it could contribute to a sharper slowdown.A market drop, headlines about trade wars, a drumbeat of recession warnings and dogmatic presidential tweets could shake consumer confidence. Although still high by historical standards, surveys by the University of Michigan and the Conference Board showed a drop in consumer sentiment in August. A new poll found 60 per cent of Americans expect a recession in the next year.All these paths towards a weaker consumer are “mights” at this point. But as Dallas Fed President Rob Kaplan warned, “If you wait until the consumer is showing weakness, my guess is you’ve waited too long.” Which leaves forecasters stuck with the uneasy feeling a recession is on the way, but no specific sense of how it will happen. We have to watch all the channels that lead to the consumer, and in the meantime follow the sage advice of economist Edgar Fiedler, who once suggested, “If you have to forecast, forecast often.” The writer is a senior fellow at Harvard Kennedy School


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