The state of the consumer economy is a major concern for large developed economies around the world. Manufacturing sectors in developed markets are contracting and as China continues to depreciate the renminbi it’s unlikely manufacturing industries in the advanced economies such as the UK, the US, and Europe will ever be able to regain their former status.
So for the US, the UK, and Europe the health of the consumer is critical. Unfortunately, since Brexit reports on the health of the consumer have been mixed.
According to data released today by the European Commission, European Union consumer confidence fell markedly in July. The Commission’s flash estimate showed euro zone consumer morale decreased by 0.7 points to -7.9 in July from -7.2% as reported for June. Meanwhile, at the end of last week, the University of Michigan reported that US consumer sentiment took a dip in early July. The university’s Index of Consumer Sentiment came in at 89.54 in July, compared to 93.5 the end of June. Also, mid-July the Index of Consumer Expectations was 77.1, compared with 82.4 at the end of June. UK consumer confidence recorded one of the biggest falls in its history following Brexit.
None of these readings or figures inspire confidence in the health of the global consumer. However, analysts at Macquarie are relatively unfazed by this dismal data and believe that the US consumer is only getting stronger, in a note titled ” King Consumer: The $13 trillion gorilla grows stronger”.
What’s the deal with the US consumer?
According to Macquarie, aggregate spending by the US consumer is rising by around $500 billion per annum and despite negative short-term trends, The Atlanta Fed’s GDPNow estimate suggests real consumer spending is tracking at a 4.5% pace for the current quarter.
Only time will tell if we should believe Macquarie’s optimistic view of the US consumer but the bank presents a good case as to why investors should not fear the decline of the consumer.
Ultimately, the sustainability of consumption comes down to income growth. Aggregate income has been growing at 4.5% over the past 18 to 24 months, stronger than the increasing consumer expenditures with the result being a higher savings rate. Wage growth and the number of workers in jobs also continues to increase, and the pace of increase in the wages and salaries subcomponent of personal income has been trending in the 4.5% to 5% range for the past two years.
Going forward, Macquarie is expecting job growth to average 150,000 per month through to the end of 2017, which should support an improvement in wage growth from the 2.5% to 3% range to over 4% as last seen in 2007.
Clearly then, Macquarie’s optimistic outlook for the US consumer is rooted in the bank’s optimistic labour market assumptions. If the employment market continues to improve, consumer spending in the US should continue to expand at a reasonable rate. On the other hand, if wage growth and job creation slow, the consumer economy will start to feel the pressure.