- Economic slowing may be offset by its secondary effects — lower energy costs and interest rates.
- Facts about consumer behavior could justify optimism about US growth.
- US consumers alone represent the biggest economy in the world.
While I was traveling in Michigan and Minnesota last week, several things became apparent to me. Concerns about the economic slowdown in China and the rest of the world are real, but I also saw signs that these fears may be overpowered by a true sense of life improving in the United States.
Stores were full of shoppers, restaurants were packed with diners and cars were out on the roads (see Exhibit 1).
Even in stricken Detroit, new buildings are going up, with an abundance of cranes and construction equipment dotting the skyline.
US consumers doing OK
The Midwest, including the industrial heartland, cannot ignore the general angst about the economy that has dominated the markets. Daily news reports harp on about slow growth, anemic wages, weak energy prices and oil field layoffs.
Yet this region’s enduring optimism still shows through. Why? No one I met there believes the business cycle is over, and everyone seems to understand that the US consumer is actually doing OK. They also recognize that market cycles are a fact of life, not the exception.
Let’s review some other facts that justify this Midwestern optimism. US wages have been rising, and the number of new claims for unemployment insurance has fallen to a 42-year low as new jobs have been created each month. The oil-related layoffs do hurt, but employment in the energy sector accounts for less than 2% of total US jobs.
Meanwhile, prices for staples and other necessities — the basics of life for US consumers — have been declining in real terms and as a percentage of total disposable income. Household budgets are not being drained as much by day-to-day expenses like food and clothing. The cost of driving cars and heating homes has fallen dramatically compared with just two or three years ago.
Here are more facts about US consumers. They are buying cars and trucks again, so the number of vehicles made and sold in the US is nearing an all-time peak. US single-family home construction was up 14% for the year through August, and each new house creates demand for appliances and other big-ticket durable goods. Core retail sales excluding autos and gasoline have wobbled from month to month but are trending at around 4% annually, with quarterly e-commerce sales growth at roughly 14% year over year. Airplane seat occupancy and hotel room occupancy are close to record highs.
Some say that the US economic expansion, now going on its seventh year, has been marked by disappointing growth. But trouble can also come from taking on debt to live better now — only to have higher interest rates snatch the good times away as the cost of credit rises. That’s what happened in the 1980s and 1990s. This time around, whatever growth consumers experience is coming from wages and job security, not from borrowing. The debt burden of US households is lower than in the previous three cycles. To me, these facts add up to more evidence of the business cycle’s durability and sustainability.
US consumer matters to global growth
Why does the US consumer matter so much? All eyes are on the current slowdown in China and its ripple effects on emerging markets, which had been the red hot engines of world growth. But to put things in perspective, if US consumer spending alone was ranked as an economy, it would be the world’s biggest, at 15% of global GDP (see Exhibit 2).
By comparison, the entire economy of China — the government, consumers, exports and manufacturing all put together — amounts to only 13% of world GDP. Without a doubt, US consumers matter more to global growth than any one national economy. And they are on a firm footing, showing few signs of being slowed down by China, currency wars or other troubles beyond US borders.
No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.