By Peter G Hall, Vice-President and Chief Economist
Big spenders walk in to the room and immediately steal the show. Everyone wants to be with them, eager to catch a piece of the action. U.S. consumers are that way: they’re the richest in the world, and they know how to sling around their cash. They are a huge part of their own economy, but the world also relies on them to get and to keep things going. Recently, their spending activity has slowed. Is something going wrong?
Consumers are a big piece of any economy. Add up all their receipts in any given year, and it usually accounts for about 60 per cent of GDP. In the U.S., it’s closer to 70 per cent, so when times are good, they’re really good; and when they’re bad, well, everyone feels it. U.S. consumers seemed unstoppable at the top of the last growth cycle. Optimism was high, productivity was strong, wages were rising and Americans were very active at the till. But they were so confident that they over-did it. They dipped into home equity with refinancing cash-outs, and financial institutions were lending like there was no tomorrow. Americans pushed the limits, and for awhile, everyone benefited.
Like all bubbles, this one burst, and in a big way. Recession wracked sales. Auto purchases tumbled from 16 to 9 million units annually – and they stayed in the abyss for 3 years. Housing saw an even more spectacular collapse: from building levels that topped 2 million units annually, they plummeted to the 600,000 level and below, staying in that range from 2008 to 2011. This clobbered purchases of furnishings and appliances, and illustrated the extent of the broader consumer pull-back.
These were the deleveraging years – Americans began dealing with their debts, and if the fallout was freakish, the effect was impressive. The debt-to-income ratio reversed quickly as the savings rate climbed, and as progress was achieved, spending slowly came back. Employment followed, slowly but surely gaining momentum. It’s now very strong, and has driven the unemployment rate down to a range that is about as low as it gets. Real wages are rising. Confidence is long since back. Moreover, low gasoline prices gave U.S. consumers a $110 billion bonus last yeadianer, and are likely to kick in an additional $50 billion this year. It seems that U.S. consumers have everything going for them. So why has spending recently faltered?
No doubt some will point to turbulence in financial markets as a cause. Americans are influenced by stock market levels, and recent plunges could have spooked spenders. Yet at the same time confidence wasn’t swayed, casting doubt on that factor. Others might note that online purchases are rising 5 times faster than traditional retail sales, understating traditional sales. A good point, but online sales are still too small to have that much influence. So if these factors aren’t material, what is?
Leading-edge consumers are a problem. These are the ones newly entering the market, getting the first job, forming a new household, having families – and making a lot of significant , first-time purchases. They are typically in the 18-34 age category, and they have a problem. The low, slow recovery – now into its 8th year – has left behind many in this generation. The share of adult children of U.S. householders living at home soared in the post-recession years to just under one third of the entire age cohort – a rate never seen in recent history, and well ahead levels following the 1981-82 recession. As long as this group of front-line consumers is in the current fix, true recovery will be on hold.
There’s an exciting flipside to this tale. Engage these consumers, and suddenly the U.S. has a groundswell of potential. Will it happen? It may actually be in the works already. Following the Great Recession, Americans opted out of the labour force in droves. Some retired, others were disabled – but a large group was simply discouraged, and gave up looking. Participation continued to fall, even when job growth returned, perplexing economy-watchers. Recently, participation has staged an about-face. If sustained, this could be a new wave of exciting growth.
The bottom line? Slower U.S. consumer spending in the face of improving fundamentals has raised alarm bells. But there’s evidence that long-dormant front-line consumers are stirring. If they do, it’ll make all the difference to U.S. – and world – growth.
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