U.S. Outlook: Are Consumers About to Feel a Squeeze?
Are Consumers About to Feel a Squeeze?
We think it’s about to get harder for consumers in the quarters ahead. For now, they actually still feel pretty good about their current job and financial situation.
Indeed, U.S. households still have a lot going for them.
The U.S. unemployment rate just hit a 50-year low. Household net worth continues to climb to new record highs. Aggregate U.S. household net worth has never been higher in either nominal or in inflation-adjusted terms. Household net worth through the second quarter has climbed $53 trillion, or 88%, from the post-recession low.
Even more impressive, household net worth is now $42 trillion higher than the dot-com peak of $71 trillion. While ultra-loose monetary policy over the past decade has had a debatable record on restoring full-employment and stable price inflation, its impact on restoring households’ asset values and deflating their debt burdens is indisputable.
The combination of rising stock and home prices and historically low borrowing costs have helped households shed a tremendous amount of debt. In fact, household debt as a share of disposable personal income has dropped from about 134% in 2008 to just 97% in 2019. That is the lowest household debt level in nearly 20 years.
Moreover, low interest rates have ensured that the challenge of paying down debt is manageable. The Fed’s debt service payments ratio, which is the ratio of debt service payments to disposable personal income, is currently at a record low 9.7%.
So what should you be watching in the quarters ahead? The good news on the U.S. labor market appears to be peaking. In fact, job opening growth peaked way back in November 2018 at 23.7% from a year ago. By August job opening growth had dropped to -4.0% from a year ago. New job openings are often a leading indicator of future employment growth. Hires are also down 0.8% from a year ago. Thankfully layoffs have so far not accelerated. They are nearly flat from a year ago, consistent with the lean jobless claim data so far in October. But watch if layoffs begin to accelerate in the months ahead: it could mean the U.S. economic slowdown is entering into a new, more dangerous phase.
Also, low unemployment today does not appear to be translating into higher real wages for workers. Real average hourly earnings growth has slowed this year to a lackluster 1.2% through September after showing some promise late last year. At the same time, core CPI inflation continues to creep higher to 2.4% today with strong price increases for medical services and housing. Inflation in those areas is being fueled by supply shortages in the marketplace, limiting monetary policy’s ability to keep these price increases under control. Households in need of these services are definitely going to feel the squeeze in the quarters ahead as incomes fail to keep pace.
Additional tariffs on U.S. consumer imports from China in December could add to consumer inflation pressures, at least temporarily. They could be another important headwind on real consumer spending growth in 2020. So, while U.S. consumers are not leading the current economic slowdown, they could join it in 2020. Consumers are definitely going to start feeling a squeeze.
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