Stronger for longer: the mighty US consumer

20 Dec 2017

US consumers, who account for 70 per cent of the national economy, are showing little signs of fatigue and continue to fuel economic expansion.

Falling unemployment combined with increasing wages will boost consumption in the next year, according to Macquarie analysis.

Americans' personal outlays have grown at an average rate of 4 per cent a year since 2010 and consumer confidence is at levels seen only twice since the 1960s.

Rather than slowing down after eight years of recovery, the pace of consumption of goods excluding energy has picked up this year and there has been above average growth in spending on services.

Consumers also appear better insulated from negative shocks than ever before, with spending on fuel and debt repayments as a share of disposable income at or near record lows.

This supports Macquarie's recently upgraded view on the pace of US economic growth.

“Sound consumer fundamentals give us confidence that in 2018 spending will remain firm," says Macquarie North America economist David Doyle.

“The consumer is more of a long-distance runner than a sprinter, and right now they appear as resilient as ever."

Employment market as a tailwind

Doyle says employment, savings and lending data all point to a positive outlook for the US economy over the coming year.

Macquarie expects the US unemployment rate to fall below 4 per cent for the first time since 2000, while real wages should grow in a low inflation environment.

“Further downward pressure on the unemployment rate over the coming 12 months gives us confidence that consumer spending will remain strong," says Doyle.

Savings rate healthier than it seems

In the past two years, the US savings rate has fallen by about 3 percentage points.

In the past, a declining savings rate has signaled consumer stress.

But Doyle says the recent fall is due to the high number of retiring baby boomers. Their employment income, which is included in disposable income statistics, is being replaced with pension benefit payments and withdrawals, which are not.

When adjusted for pension benefit payments and withdrawals, the savings rate has remained stable.

“Surging retirements mean an increasing share of consumer incomes will come from sources unrelated to employment," says Doyle.

No signs of excesses in lending

Consumer lending data also looks healthy, with modest credit growth, and mortgages and car loans displaying much safer profiles than they did before the global financial crisis. Bankruptcies remain significantly below levels of the past decade.

Exceptions include a recent increase in credit card delinquencies, but Doyle believes these represent “only modest yellow warning lights."

“There are very small signs of trouble emerging for the consumer, but nowhere near levels where they'd point to a problem," says Doyle. This contrasts with business investments, where he says vulnerabilities have emerged.

Leading indicators improve

Macquarie upgraded its forecasts for US economic growth and interest rates in October, following an uptick in leading indicators, an improved outlook for exports and the increased likelihood of a tax overhaul.

Doyle now expects real gross domestic product to expand 2.3 per cent in 2018, up from a 1.6 per cent estimate in September. He sees the federal funds rate doubling to 2.5 per cent from current levels and the 10-year Treasury yield peaking at 2.75 per cent in the current cycle, up from 2.4 per cent currently and a 2.3 per cent estimate previously.

“Not only was data for September and October strong, but data that had been looking weak over the summer was revised upwards," says Doyle.

Another indicator pointing to continued expansion comes from the interest rate market, says Doyle.

Longer term rates remain comfortably higher than short-term ones, a sign of health from the yield curve. In recent cycles, a curve inversion preceded an economic downturn by nine to 18 months.

“The yield curve is still suggesting a healthy outlook," says Doyle. “You will still see it flatten significantly further over the next 12 months, but we don't think you'll see an inverted yield curve in 2018."

For a copy of the report King Consumer, contact your Macquarie representative.

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