Consumer Confidence: The One Economic Problem the Fed Can’t Fix?
“The April spending estimate can be considered a mixture of positive and negative news for the economy,” noted Gallup’s Justin McCarthy, describing Americans’ reports of daily spending last month. “On the positive side, the $88 average remains on the high end of what Gallup has measured historically, and is clearly above the depressed spending that represented the ‘new normal’ during the recessionary and post-recessionary period of 2009 through 2012. On the negative side, the April estimate is no higher than the estimate from March 2014 or April 2013, suggesting no further growth in spending.”
For the month of April, excluding household bills and major purchases like a car or a home, Americans spent an average of $88 per day, an amount little changed from March and February’s $87 or from the $86 per day recorded in both April 2008 and April 2013.
Yet at the same time, marginally more Americans report to be spending more, and marginally fewer Americans report to be saving less. Americans who are spending less are more likely to say this pattern is their “new normal,” rather than a temporary change. But still the fact remains that the downtick in the overall percentage of those who are spending less has come mostly from those who said their lower spending was temporary.
The good news is that the percentage of Americans who say they are spending less temporarily has also declined, dropping from more than 20 percent in 2009 to only 10 percent in April. “In short, it appears that the temporary negative effect of the recession and economic downturn on spending is winding down, leaving only the hard core of those who claim to have settled into a new, normal pattern of spending less,” said Gallup’s Brendan Moore.
Gallup’s data point to an important truth: Consumers are no longer spending with as much frugality of the so-called “new normal” period that spanned from 2009 to 2012. In fact, several measures of the health of the American consumer are growing at rates unseen for years, and that is a positive indicator for the United States economy. Strong consumer spending is essential for the recovery.
Because government and business spending have largely remained remained weak in recent quarters, the economy has been heavily dependent on consumer spending — which accounts for approximately 70 percent of gross domestic product in the United States — to fuel growth. With first-quarter gross domestic product expanding at an anemic 0.1 percent rate thanks to lagging exports and the frigid winter weather’s grip on construction and manufacturing, consumer spending did much of the economic heavy lifting.
But while consumers are not as worried about their wallets as they were immediately following the recession, spending is not exactly recovering.
Consumer spending slowed slightly in the first quarter, growing at a 3 percent pace as compared to the previous quarter’s 3.3 percent expansion, which was the greatest increase recorded in three years. However, while consumer spending was relatively strong in the first three months of the year, it is important to note what Americans purchased in order to gain a better understanding of the health of consumers. From January to March, spending on goods slowed to a 0.4 percent pace, while spending on key services — like healthcare and energy — accelerated to a 4.4 percent pace.
That trend was also evident in March’s Personal Income and Outlays report. As data from the Department of Commerce showed, the 0.9 percent increase in household purchases — the largest recorded since August 2009, when the economy was just emerging from recession — was fueled by spending on cars, healthcare, utilities, and other services. In particular, spending on healthcare swelled 0.9 percent, the greatest gain since 1980. A great majority of that spending increase appears to be driven by the number of low-income Americans gaining insurance through the Affordable Care Act’s expanded Medicaid coverage.
“March’s solid rise in real spending is due to two factors,” Capital Economics’s Paul Dales explained in a research note. First, the “unwinding of the weather distortion generated” a 1.4 percent month-over-month jump in spending on goods, he said. A surge in healthcare spending, driven by the previously uninsured who are beginning to use new policies provided by the Affordable Care Act, led to a 0.4 percent increase in spending on services. In total, spending on services rose 0.7 percent, with utilities contributing significantly, as well.
But the problems dragging down consumer spending — economic confidence and stagnant wage growth — have by no means disappeared.
Stagnant wages and higher payroll taxes have affected spending for lower-income earners. Over the past year, average hourly earnings rose a less-than-stellar 2.1 percent, a very small increase by historical standards. More specifically, real average wages rose just 0.5 percent in March compared with a year earlier, while consumer prices jumped 1.5 percent, erasing that entire wage gain. Still, that wage gain was the biggest recorded since August.
Throughout the nearly five-year-long recovery of the United States economy, Gallup’s economic confidence measure has never reached into positive territory: The highest it’s reached is a reading of -7, which was recorded in late May 2013. Since then — as rising mortgage rates stalled the housing market recovery, job creation slowed, and consumer spending struggled to gain momentum — the index has dipped, dropping as low as -39 during October’s government shutdown.
The Economic Confidence Index, which averages how Americans rate current economic conditions with their expectations for the future, recorded a reading of -16 for April, roughly matching the readings seen each month since January. More specifically, one in five Americans graded the U.S. economy as weak, while 34 percent rated it poor. Thirty-nine percent of Americans said the economy is improving and 56 percent said it is getting worse. The one bright spot in Gallup’s data is that confidence was higher than usual in the last week of the month.
By looking at weekly readings of retail sales compiled by the industry trade groups the International Council of Shopping Centers and Johnson Redbook, it seems consumer spending can hardly be described as strong. While both measures have gained some momentum in recent weeks, after posting dismal numbers earlier in the year, unfavorable weather has once again negatively impacted spending. Poor weather and flooding in the eastern United States and dry conditions in the western part of the country depressed retail sales in the week ended May 2.
After gaining 1.6 percent on a weekly basis in the previous period, same-store sales growth fell 2 percent. On a year-over-year basis, sales slowed from a 3.1 percent growth rate to 2 percent. Meanwhile, the less authoritative Johnson Redbook reading showed evidence of strong sales, expanding at a 4.4 percent pace over the past 12 months following a 3.8 percent rate of growth.
Of course, both indexes provide a narrower snapshot of consumer spending habits than the Department of Commerce’s retail sales data — excluding such categories as automobile purchases, which primarily drove March’s strong retail sales growth. Specifically, the ICSC-Goldman Sachs index covers what is known as the general merchandise portion, or approximately 10 percent, of retail sales. In general, throughout the out the recovery, American consumers have been more confident purchasing longer-term “big ticket” items than increasing everyday expenditures.
Still, Gallup’s data, as well as these indexes, do point to lingering weakness in consumer spending. John Rothe, a portfolio manager, suggested in a recent blog post that perhaps one of the biggest problems for the United States economy is that the consumer-based economy is shifting from one of excess to one of thrift. And that is a problem the Federal Reserve “can’t fix,” he argued.
Supporting that argument, Rothe points to another Gallup poll that measures Americans’ enjoyment of saving versus spending. So far in 2014, 34 percent of Americans say they enjoy spending money more, while 62 percent prefer saving. This measure may not accurately reflect actual spending or saving, but it does provide important insight into the psychology of the American consumer’s approach to money.
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