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Economic Insights

The health of U.S. consumers is critical for U.S. economic growth. Here are five reasons why they may be extending their spending.

 

In Brief

  • The U.S. consumer sector accounts for nearly 70% of the nation’s gross domestic product.
  • We have identified five factors that should continue to support U.S. consumer spending and, by extension, U.S. economic growth. They include:

            1) Faster job growth
            2) Rising wages
            3) Lower oil prices, accompanied by a stronger U.S. dollar
            4) Stronger household balance sheets
            5) Solid housing-market fundamentals

  • The key takeaway—The U.S. economy may demonstrate surprising strength as a result of domestic consumption, with the distinct possibility that 2016 could feature stronger growth than 2015.

 

The U.S. consumer sector is the engine that powers the U.S. economy, accounting for nearly 70% of the nation’s gross domestic product (GDP). Early in 2016, a number of factors seem poised to enable the U.S. consumer to once again push the rate of U.S. economic growth above that of other developed countries, even amid concerns about an economic slowdown in China and other emerging markets. 

With total U.S. exports accounting for only 13% of U.S. GDP, and exports to China only 0.9%, the U.S. economy is uniquely dependent on internal consumption. And right now, that consumption looks robust. A look at the five major factors currently influencing the U.S. consumer suggests not only that a U.S. recession is unlikely but also that U.S. growth in 2016 may exceed that of 2015.

1) Faster U.S. Job Growth
Employment growth is fundamental to improving U.S. consumption, and, therefore, economic growth.  Based on data from the U.S. Bureau of Labor Statistics (BLS), 2.74 million jobs were created in the United States in 2015, an average of 228,000 per month. In the process, the unemployment rate dropped, from 5.7% in January 2015 to 4.9% in January 2016. 

This trend in job growth appears to have entered 2016 with some momentum. The February U.S. jobs report, released by the BLS on March 4, showed unexpectedly strong jobs growth of 224,000, while the three-month average through February matched the full-year 2015 pace of 228,000. In addition, the labor force participation rate increased in four of the past five months (it was unchanged in November), suggesting that the availability of jobs is attracting applicants who were not previously looking for jobs.  

And job availability may be the clearest indication that employment growth can continue in 2016. According to the most recent Job Opportunities and Labor Turnover Survey (JOLTS) from the BLS, there were 5.6 million job openings in December 2015, more than the pre-recession peak of 4.2 million in March 2007, and far more than the 2.74 million jobs filled last year. This trend may bolster perceptions in the labor force that jobs are readily obtainable, thereby boosting workers’ confidence that they can continue or even increase spending. One measure of increased confidence from the JOLTS report may be reflected in workers’ willingness to leave jobs, or the quits rate. This rate has returned to its pre-recession level, implying a level of confidence that another, perhaps better, job is available, potentially supporting spending patterns and U.S. growth.

2) Better U.S. Wage Growth
As both the U.S. labor force and labor-participation rate increase, elimination of slack in the job market should permit more rapid wage growth. This phenomenon is just starting to unfold. For the first time in several years, the BLS’s monthly reports have shown wages rising by more than 2.0%, with hourly earnings increasing by about 2.4% over the past five months. (For the same period a year ago, wages increased 2.0%.) This coincides with fewer applicants per job opening, according to the JOLTS report.  The applicant-to-job opening ratio reached 6.8 to 1.0 in 2009, and has declined steadily, to 1.4 to 1.0, even lower than the 1.8-to-1.0 ratio before the recession. The current ratio implies that during 2016, as employers compete for fewer qualified candidates, wage pressures may result. 

Other developments, including higher minimum wages in 14 U.S. states at the start of 2016, as well as wage increases announced by major nationwide employers, such as Wal-Mart, Target, and Starbucks, support this trend. The combination of continued job growth and rising wage growth can be a powerful boost to consumption and economic growth in 2016.

3) Lower Oil Prices, Accompanied by a Stronger U.S. Dollar
Cheaper gasoline and lower home-heating costs also can promote consumption in the United States. As of March 1, 2016, the national average price for regular gasoline was $1.75 per gallon, or almost 30% lower than the year-ago price of $2.40, according to the American Automobile Association. Similarly, heating oil at the end of February was $2.09 per gallon, or almost 35% lower than the $3.19 it was 12 months earlier. At the same time, a stronger dollar has created cheaper imports, which is a further boost to consumption. According to the BLS, import prices in January were 6.2% lower than they were a year ago. 

Lower fuel bills and lower-priced imports empower consumers to spend more on other items. Although the price of oil and the strength of the dollar may stabilize, relative price benefits are likely to be enjoyed by consumers for much of the year, allowing broader-based consumption gains and enhancing any multiplier effect associated with such spending. 

4) Stronger U.S. Household Balance Sheets
While job growth, wage growth, and the opportunity to purchase goods at lower prices are likely factors that could stimulate consumer spending, such constructive benefits, however, could be offset by additional debt obligations that grow even more rapidly than income and purchasing power. Fortunately, that is not the case. In fact, consumer balance sheets are, arguably, in the best shape they have been in more than 30 years, according to a recent report from the U.S. Federal Reserve (Fed). Total debt-service payments, including mortgages and consumer debt, represent the smallest percentage of disposable personal income since records were kept in 1980. Looking at all financial obligations provides a similar conclusion. As a percentage of disposable personal income, all financial obligations account for the smallest portion since 1981. 

Such healthy balance sheets imply that higher household income could comfortably support additional consumption without compromising the financial health of consumers. Further growth doesn’t need to come at the expense of more debt, but if larger purchases are desired, healthy balance sheets seem ready to provide support for any increase in credit to fund additional consumption. 

5) Solid U.S. Housing-Market Fundamentals
Finally, the housing market—a pillar of U.S. economic strength in 2014 and 2015—seems positioned for continued expansion in 2016. The pace of household formation, low interest rates, and ready availability of capital seem aligned to support growth in the sector in in 2016.

Despite a disappointing fourth quarter of 2015, William Dudley, president of the Federal Reserve Bank of New York, expects household formation to receive a boost in 2016. In January, Dudley pointed out that rising employment is likely to boost the household formation rate and that low mortgage interest rates should keep housing relatively affordable. Rising employment may also increase household formation by allowing 18- to 34-year-olds living with their parents to move out and establish their own households. The portion of 18- to 34-year-olds living with their parents was 31.5% in 2015, compared with 27.5% prior to the financial crisis.

Those looking to buy a home will find help from low mortgage rates. According to Bankrate.com, the rate on a 30-year fixed mortgage averaged 3.68% during February 2016, while a 15-year fixed mortgage averaged 2.80%. Both were lower than their averages for 2015.

More important, U.S. lenders are making it easier to get mortgage approval. The Fed’s most recent Senior Loan Officer survey shows for the October–December period more mortgages lenders reduced lending standards than raised them. An easing of mortgage loan standards was reported by 18% of banks compared to 3% indicating a tightening. This was the seventh straight quarter of reduced lending standards. Easier credit standards, low mortgage rates, and a faster pace of household formation should combine to assure that housing will again contribute to U.S. economic growth in 2016.

Summing Up
While growth in China and other emerging markets could slow this year, the U.S. economy may demonstrate surprising strength as a result of domestic consumption, with likely boosts from steady job growth, rising wages, cheaper fuel and imported goods, improved household balance sheets, and attractive conditions for housing. With a little help from business spending and an expanded federal budget, 2016 could feature stronger U.S. economic growth than 2015, despite economic hurdles elsewhere in the world.

 

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