US consumer tipped to grow even stronger

19 Oct 2016

After years of spearheading the tepid recovery in the world’s largest economy, the strength of the American consumer is expected to continue to rise.

Rising wage growth, scope for debt taking, and resilience to potential hikes in gasoline prices and interest rates are all combining to generate higher spending, according to Macquarie Securities North America economist David Doyle.

Consumer spending grew in the second quarter at a pace only seen once in the past decade. Americans, whose $US13 trillion wallet makes up 70 per cent of US gross domestic product, are also saving more than in the past after having reduced debt for most of the past decade.

“The consumer is in the healthiest position we’ve seen in 15 to 20 years,” says Doyle. “There were headwinds for a significant period of time, but the evidence now is that we are seeing a turn.”

Behind this spending firepower lies the recovery in the jobs market since the global financial crisis, which has pushed the unemployment rate under 5 per cent.

Average hourly earnings grew by an annual 2.7 per cent in July, the largest increase in seven years. That pace may tip higher to 2.8 per cent in 2016, Macquarie estimates, if the year-to-date pace continues, an increase from the average 1.9 per cent recorded between 2009 and 2014.

“The labour market is tight and you can expect further pick-ups ahead in wage growth,” says Doyle. “And that will increase consumers’ incomes and confidence.”

War chest against rising costs

Because aggregate income has outgrown spending, households have been able to save more. Improved household balance sheets will prompt consumers to start a new debt cycle, Doyle says.

The ratio of households’ debt-service payments as a share of disposable personal income is hovering at around 10 per cent, the lowest level since at least the 1980s. Similarly, the share of disposable income spent on gasoline has only been this low on three occasions since the 1940s, providing a buffer in case oil prices rise.

“While the higher savings rate in recent years has depressed spending, it also means consumers are positioned to absorb future income or price shocks,” Doyle says. “They are well prepared to absorb any potential increases on either the energy or interest expenses fronts.”

Instead, Doyle sees future increases in inflation and interest rates as an effect of, rather than a threat to, this steadfast consumer trend. That contrasts with the previous economic cycle, when inflation was driven principally by an increase in the oil price.

“We are expecting the healthy, benign inflation driven predominantly by demand for workers and a need to hike wages in order to attract employees,” says Doyle. “And the further improvement in wage growth will dwarf the slow and gradual increase in interest rates.”

Cheaper services, more goods

Two thirds of all consumer spending in the US is concentrated in services boosted by higher prices. Spending on goods, on the other hand, has decreased as a result of lower prices, even if quantities have grown steadily since 2009.

Entertainment, travel and convenience retailers are among the sectors that are likely to continue to grow, explains Doyle.

And while an increase in spending and consumer leverage will underpin the broad US economy, financial services and construction-related industries are likely to be the real beneficiaries.

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