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Economic Insights

In the absence of fiscal stimulus, the U.S. consumer will play a bigger part in determining the trajectory of the nation’s growth for the rest of 2017. 

 

In Brief

  • For the remainder of 2017, U.S. economic growth appears largely dependent on the U.S. consumer. We have identified four factors that may influence consumers’ willingness to boost spending in the coming months.
  • Job and wage growth—Persistent U.S. job growth, even at a slightly lower level than in 2016, combined with slow and steady real wage growth should support consumption.
  • Consumer balance sheets—Though total U.S. household debt has increased recently, it actually represents a smaller percentage of household net worth than in prior years.
  • Household net worthImprovements in the equity and housing components of U.S. consumer balance sheets should buttress confidence and support spending.
  • Consumer confidenceWidely followed measures of the mood of the U.S. consumer remain close to multiyear highs.
  • The key takeaway: Even in the absence of economic stimulus from U.S. fiscal policy initiatives, a well-positioned consumer seems capable of supporting 2.0% U.S. growth this year. 

 

With U.S. monetary policy on track for normalization toward slightly higher rates, and fiscal policy changes involving tax reform and infrastructure spending likely delayed until 2018, U.S. economic growth seems especially dependent on the resilience of the nation’s consumers. Consumption accounts for about 70% of U.S. gross domestic product (GDP). 

The strength of U.S. consumer balance sheets, consumer confidence in the economy, and the willingness to spend will be critical during the next part of the economic cycle, as the economy faces a potential headwind of slightly higher interest rates, while the tailwinds of fiscal policies continue to be postponed. What follows is a closer look at the factors that may influence U.S. consumers’ willingness to continue opening their wallets.

Fundamentals: Job and Wage Growth
Consumption initially is dependent upon jobs, and the income they generate. The United States has continued to create a meaningful number of jobs, while average hourly earnings have crept higher. Based on data from the U.S. Bureau of Labor Statistics, nonfarm payrolls increased at an average monthly rate of 180,000 in the first half of 2017, modestly lower than the average gain of 187,000 in 2016, but still very respectable, given a 4.4% level of unemployment, which is near its lowest level in 16 years. Average hourly earnings have increased 2.5% over the past year, which is above the 1.4% inflation rate indicated by the Personal Consumption Expenditures Index, the U.S. Federal Reserve’s (Fed) preferred measure of inflation. Persistent job growth, even at a slightly lower level than in 2016, combined with slow and steady real wage growth should support consumption, assuming the consumer’s continued confidence in the U.S. economy and a willingness to spend.  

Consumer Balance Sheets
Supporting confidence—and the “animal spirits” of consumer spending—is the strength of U.S. household balance sheets. Improvement in consumer balance sheets began in the aftermath of the recession of 2008–09. Consumers responded to heavy debt loads and loss of home equity by paying down debt immediately following the downturn. Since then, households gradually have increased their debt levels, again, especially with regard to student loans and automobile debt, but the increase has been cautious.

Nominal consumer debt levels have crept back to the levels of 2008, but relative to household equity, they are close to their lowest levels in the past 20 years. Total household debt outstanding is less than 15.7% of household net worth, according to the Fed’s financial statements Z.1 report, released on June 8, compared with an average of more than 20% during the 2003–08 period and a peak of about 26% in 2009.  Furthermore, it is important to note that with interest rates still close to their historical lows, the cost of servicing these debt levels as a percentage of income is lower still.

Household Net Worth
In addition to more manageable debt servicing, U.S. consumers’ confidence also has benefited from rising net worth. The Fed’s most recent Z.1 release shows total U.S. household net worth at an all-time high: 73% above the 2009 trough. First-quarter 2017 net worth was up 8.3%, year over year. Households with equity investments or with equity as part of their retirement plans have enjoyed the benefits of major stock indexes repeatedly reaching new highs in 2017. More broadly, households that own their homes have enjoyed housing price appreciation over the last several years. The most recent S&P CoreLogic Case-Shiller 20 City Composite Index for values in April was, for example, up 5.7% year over year, and 47% higher than the March 2012 low point. The Zillow House Value Index showed a 7.4% year-over-year change, as of May 31, 2017. This improvement in the equity and housing components of consumer balance sheets should buttress confidence and support consumption.

Consumer Confidence
The increase in net worth, combined with improvements in household balance sheets, a steady job market, and a respectable savings rate of 5.5%, should allow U.S. consumers to feel better about themselves, and their prospects. Indeed, widely followed measures of U.S. consumer confidence remain close to multiyear highs. The Conference Board Consumer Confidence Index, at 117.9 for May 2017, is off from its March high, but substantially better than 97.4 in May of last year. Similarly, the University of Michigan Consumer Sentiment Index reached 97.1 in May 2017, among its highest readings since 2004. 

Economic Implications
While high levels of confidence, rising net worth, continued job growth, and gradual wage improvement don’t guarantee consumption, they collectively create an environment conducive to spending that supports economic growth. Consumption, which accounts for the lion’s share of U.S. GDP, could again, and likely will, support a 2% rate of economic growth in 2017, despite slightly higher rates and an absence of fiscal stimulus. 

The biggest consumer concern may be that higher interest rates will present a potential headwind for housing. However, rising household formation seems to support continued demand, while the Fed’s incrementally cautious approach to raising rates seems to reflect its sensitivity to any shock that might compromise growth. In terms of fiscal stimulus, tax reform and infrastructure spending seem unlikely to be passed by the U.S. Congress until 2018. While this will not promote consumption and economic growth this year, it seems unlikely to impede spending. In the meantime, reduced regulation could promote corporate profitability, and, potentially, business spending to take advantage of new opportunities, adding to GDP growth in 2017. U.S. Government spending also seems positioned to contribute a greater share of economic growth this year. 

Without the help of meaningful fiscal stimulus, GDP in 2017 is unlikely to approach the 3% longer-term target that the current U.S. administration believes is attainable. But with some help from business investment and government spending, and despite the prospect of higher interest rates, a well-positioned consumer, in our opinion, seems capable of supporting 2.0% U.S. growth this year.

 

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