Written By: Stephanie Williams – Corporate Finance
US personal-consumption spending is widely cited as a reason to be hopeful about the health of the US economy. The stronger US consumer market may help keep some developing economies afloat, but likely not as much so as in the past. If you listen to many economists, the impression you get is that the consumer market is not only strong at present, but there are widespread incentives for continued improvements in consumer spending in the future.
“Macro data continues to show that the global economy’s $13 trillion gorilla, the US consumer, is getting even stronger,” analyst David Doyle of Macquarie Capital Markets wrote in a recent note to clients.
What factors are likely to keep the US consumer market going strong? One reason economists predict continued strengthening of US consumer spending is that improving wages are fueling spending. That is expected to continue adding to the growth of the consumer sector in the coming months because companies have only started to comply with changing minimum wage laws. So far in 2016, several large companies from JPMorgan Chase, Walmart, Starbucks and United Airlines have announced pay hikes for their employees. Data from the Department of Labor indicate that the typical weekly wage in the US today is in the vicinity of $828. That compares favorably with weekly wages of less than $730 eight years ago during the global economic meltdown. Because of rising incomes and other favorable factors, Doyle noted that consumption expenditure in the US could expand at an annualized rate of 4.5 percent quarter-over-quarter. That implies a rate of growth last seen nearly a decade ago.
A strong job market is another reason for optimism about the health of the US economy and a reason future expansion in consumer spending is expected. Not only are American employers hiring more people, but wages are also improving, and the net effect of these activities is encouraging consumers to spend more. The US economy added 287,000 jobs in June, surprisingly higher than the mere 11,000 jobs added in the prior month.
The other factor that economists see fueling continued growth in the US consumer sector is the appetite that consumers are showing for debt. First, it is cited that the household-debt-to-disposable-income ratio has declined significantly to almost a level not seen since 2002, suggesting that consumers are ready to take on credit to finance their purchases. The lower interest-rate environment has also provided a favorable atmosphere for borrowing as the cost of credit is considerably lower.
Analyses of US consumer income allocation to cover energy costs and borrowing expenses are cited to be at low levels that were last seen several decades ago, indicating that American consumers look prepared to absorb any increases in the prices of gas and costs of credit given the growing expectations that the Federal Reserve will hike interest rates at least once in 2016. While higher interest rates have the potential effect of adversely impacting consumer borrowing, in this case consumers can quickly adapt to higher interest rates, thus avoiding a slowdown in consumer debt spending. Economists point out that the areas seeing significant increases in consumer spending are the e-commerce and services sectors.
World economies are struggling, and their struggles started long before the UK stunned the world with its decision to ditch the European Union. Now Brexit has added to the uncertainty of the global economy with countries such as Japan appearing to be on the brink of attempting extraordinary monetary-easing measures, such as helicopter-money policy. The question many are asking is whether the US consumer sector can save the global economy from falling into a recession. Looking at the factors cited showing why the US consumer market is likely to continue growing, the impression is that a stronger US consumer sector could provide a free ride to some developing economies. But there is a challenge; the fact that the rest of the world has expanded rapidly in recent years implies that even a robust US consumer market cannot keep everyone afloat, as may have been the case in past decades.
The flat growth in US real imports in recent years is another reason the US economic-growth engine, the consumer market, may not offer support to everyone out there who needs a ride. But economists say the situation could be better if every developing economy played its part in spurring domestic growth. For instance, developing economies should undertake tax reforms to spur domestic growth and increase infrastructure investment to build up the supply of money on the market. Growing local businesses is another area on which developing economies can focus to avoid over-relying on US consumers to pull them out of deflation.
The problem for the US is that despite its robust consumer spending, it could still be smeared by problems facing its trade partners abroad. Developing economies need to drive their own growth; China, for example, could see its economic growth grind to halt, thus adversely impacting the US.