The U.S. consumer boom

Black Friday seems to have been another smash hit for the U.S. economy. Any economy would welcome this news, but when it’s the world’s top economy and growth leader, well, everyone benefits – at least in the short term. The U.S. has seen its consumers go on a buying binge many times before, only to regret it when the bubble burst – 2008 was a classic example. Is this one of those times, or is there some staying power this time?

Recent U.S. consumer strength is no mere blip. Real spending is rising at a 4 per cent annual rate, and there seems to be no let-up rolling into the fourth quarter. Retail sales numbers agree: non-auto sales are rising at a 6-per-cent-plus annual pace, and even with flattish auto sales, the overall numbers are decent. Given that the U.S. consumer, at 68 per cent of GDP, pack more of a punch than for most OECD nations, this is good for overall economic growth. So far, the numbers seem to be strong.

What’s keeping them up? One of the principal drivers of consumer spending is job growth. U.S. employment numbers are on an impressive 8-year run, and they don’t seem to be losing any steam. Wage growth has been muted for most of the cycle, but in the past two years has increased to the point that year-over-year growth is at a cyclical high of around 2.8 per cent. Put these two together, and there is a lot more consumer cash floating around than at most points in the last decade. Again, times sure seem to be good.

Increasingly, pundits are worried about the sustainability of the situation. Businesses are complaining about the lack of skilled employees, and this is now turning into griping about the availability of regular workers. The unemployment rate seems to agree: it’s at 3.7 per cent for the second straight month, about as low as it ever gets. In fact, it is well below what economists would consider to be sustainable; that rate was thought to be in the 4.5-to-5 per cent window, and is, ahem, under revision. Then there are weekly UI claimants. That number is also crazy-low, having fallen steadily since 2009 to the current 200,000-mark. These are typical late-cycle signs – so is the party almost over? 

Extremely tight standard indicators ignore one key fact. Labour force participation has been extremely low in the current cycle, suppressed no doubt by the severity of the Great Recession and the sluggish growth that persisted for many years following. Millions of workers were sidelined, a phenomenon that dulled the numbers right through 2016. At that point, without any particular policy shift or new program, the tight labour market began to draw the disaffected back in. Since then, over a million young workers have scored their first meaningful job, and after a long hiatus, the mid-career folks are also flooding back in. The best news? There are still millions more of all ages that are waiting for their chance – this could go on for some time, drawing out the labour market’s capacity to grow. 

Pessimists point to two potential spoilers. What if something interrupts the flow, jolts consumers a bit and alters the momentum. Are they so leveraged that any tripwire will level them? Actually, debt-to-income levels have been falling since the recession – it seems on that count, Americans learned a hard lesson, and kept it up. Helping the situation is a higher level of savings from disposable income. During the late-cycle bubble, the saving rate was 3.5 per cent; now, it’s almost double that. It doesn’t look like a debt crisis is in the works.

What about interest rates? Well, with better debt dynamics, the recent rise in mortgage and consumer credit rates won’t hurt as much. But regardless, we are coming off an ultra-long period of ultra-low rates, and normalization could be a big shock to many. So far, it’s not the case; consumer confidence is still reaching for almost impossible cyclical highs, in spite of the fact that U.S. rate hikes have been in the works for over 30 months, plenty of time to begin eliciting a reaction. Consumers do seem to be on a roll.

The world’s big spenders are employed in greater numbers, commanding higher wages, confident, saving more prudently, and also very active at the till. And there is capacity to keep this going for some time to come. While trade tiffs are making others twitchy, Americans seem irrepressible. We can all say a word of thanks…and cash in.