Home Commentary The strength of U.S. consumers is overstated

The strength of U.S. consumers is overstated

By

Lakshman Achuthan and Anirvan Banerji

-

01/31/2020

The consensus is that the U.S. consumer is still strong enough to propel the economy forward even though the manufacturing sector has weakened. But the hard economic data strikes a discordant note. In particular, growth in industrial production on a year-over-year basis remains in a decisive downturn. The production declined in 2019 amid losses in

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The consensus is that the U.S. consumer is still strong enough to propel the economy forward even though the manufacturing sector has weakened. But the hard economic data strikes a discordant note. In particular, growth in industrial production on a year-over-year basis remains in a decisive downturn. The production declined in 2019 amid losses in manufacturing jobs in recent months. The weakness in manufacturing has caused the consensus to trumpet the strength of the consumer. Yet, the consumer, while reportedly confident, is not spending hand over fist. Real retail sales growth fell to a six-month low of 1.25% in November on a year-over-year basis, dropping from 3.75% two years earlier. Yes, there was a big rebound in December, but mostly due to a favorable comparison to a disastrous December 2018. What gives? The lifeblood of the average consumer is job growth, not stock prices. So it’s important to recognize that year-over-year growth in nonfarm payrolls has dropped to its lowest level in 2.25 years. Worse still, growth in total pay has fallen even faster over the past year than growth in hours worked, slowing to a 3.8% pace from almost 5.5%. For the average American, that sharp slowdown in the growth of total pay limits spending growth. No matter how confident consumers might feel, there’s only so much fresh debt they can incur to support more spending. While financial markets buoyed by increasingly accommodative central banks may be supportive of higher-income consumers, the average American is under considerable strain. Despite low yields on U.S. Treasury securities, average credit card rates have climbed inexorably in the last five years, surging above 15% in 2019. Meanwhile, one-third of those buying new vehicles have negative equity in the used ones they are trading in. And farm debt has topped $400 billion, up almost 40% since 2012. Regardless of the consensus view that the consumer is “strong,” there’s little indication that the deceleration in economic growth is over. As long as that’s the case, the risk of a recession can’t be taken off the table for 2020. Anirvan Banerji and Lakshman Achuthan are Bloomberg Opinion columnists.