Can the U.S. Consumer Sustain?

Scott Anderson
Posted by Scott Anderson
Chief Economist

Consumer confidence has rebounded strongly since August.

Record stock market prices and continued job growth have helped revive consumers’ spirits in recent months.

The University of Michigan’s consumer sentiment measure jumped to 99.8 in its final reading for January – a full 10 point gain off the August lows and not far from the expansion highs of 101.4 hit way back in March of 2018.

The increase in consumer confidence is a welcome development, but it is only one of the factors we weigh when forecasting future consumer spending growth. The economic indicators we got this week, suggest there may be more trouble brewing for household spending and finances in the months ahead.

Our primary concern is that real personal income trends have been deteriorating for a while now and continue to miss analyst expectations, despite half-century low unemployment rates across much of the country.

Real personal income, excluding transfer payments, fell 0.1% in December and only increased at a lackluster 0.7% annualized pace in the fourth quarter of 2019.

Consumer confidence over time can help support consumer spending growth, but it is actually real personal income growth that keep the consumers’ engine revving.

Without the income growth, rekindling consumer spending growth in the quarters ahead will be like starting a campfire with damp wood that is starved of oxygen.  You might get sporadic flames of improved consumer spending growth, but they will be short-lived and ultimately unsustainable.

Taking a longer-term perspective, the disconnect between real personal income growth and real consumer spending over the past year comes even more into focus. Real consumer spending grew 3.3% over the past twelve months, while real personal income growth slipped to just 1.7%. Real personal income growth peaked year-on-year in December 2017 at 4.4%.

The rebound in consumer confidence should keep U.S. consumers returning to the store for a while longer and we see no reason to panic at this point. The most likely outcome is a continued gradual slowdown in real U.S. consumer spending growth throughout 2020.

But there is little doubt that some consumers will be feeling more of a pinch in their monthly budgets in the days ahead and will respond by tightening their belts. Should the economic risks of the coronavirus spark a stock market meltdown, the outlook for future consumer spending growth could quickly become far darker.

Consumer spending remains the key to our economic forecast for 2020. Any material change to the U.S. consumer outlook will quickly lead to a material change in our U.S. economic and interest rate outlook for 2020 and beyond.

To learn more, check out this week’s U.S. Outlook Report.

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