The U.S. economy has hit a bump in the road. For the sake of simplicity, we can say the economy is OK, but not great. We keep chugging along, but with little help from one important passenger — the American consumer.
So, where exactly are we with the state of the U.S. economy? More importantly, what is the American consumer’s impact in driving this slowdown?
To start, we can look at the latest data for gross domestic product, or GDP, released by the U.S. Department of Commerce, which shows the U.S. economy grew at an annualized rate of 1.2 percent in the first quarter of the year. This report, issued monthly, reflects on and revises data for the prior quarter. The 1.2 percent growth rate was actually better than expected and above last month’s 0.7 percent reporting.
In a nutshell, GDP represents the total dollar value of goods and services produced by the U.S. It serves as the key indicator on the health of the American economy. GDP consists of four components: personal consumption expenditures, business and residential investment, net exports and government purchases. Quality GDP growth reflects a strong and vibrant economy. An increase in consumer and business demand for goods and services must be accompanied by an increase in production and employees to meet that demand. This translates to rising wages for employees and greater disposable income. For companies, economic growth means greater corporate profits, reflected in higher stock prices.
But to truly interpret the GDP data, we need to dig a bit deeper, and as they say, try to read the tea leaves. In a healthy economy, the annual growth rate of GDP is around 3 percent. Many analysts will rush to point out that in recent years, first quarter GDP has repeatedly disappointed, only to bounce back in the spring and summer. However, this argument belies the greater point that economic growth has been on a downward trend since last fall. After an abysmal start to 2016, GDP for the third and fourth quarter was 3.5 percent and 2.1 percent, respectively. For all of 2016, the rate of growth was just 1.6 percent. One can argue such lackluster performance hardly serves as an impending springboard to future economic vitality.
A closer examination of recent GDP numbers reveals the source of economic concern that has been keeping the financial markets and the Federal Reserve up at night. And this brings us to the American consumer.
Of the four components that comprise GDP, personal consumption expenditures are the greatest laggard. These consist of household purchases of durable and non-durable goods and services such as cars, furniture, food, clothing, education and transportation, among others. The latest GDP data indicates that consumer spending has increased only 0.6 percent in the past year. This is the slowest pace since the fourth quarter of 2009.
Why so much concern over a single component within GDP? Aren’t there three other pieces to the economic puzzle that can carry the weight? To answer these questions we need to assess the significance of personal consumer spending on the U.S. economy. In reality, consumer spending is the key driver of the economy, accounting for more than two-thirds of all U.S. economic activity. Strength or stability in the other three GDP components can quickly be overshadowed by the sheer magnitude the American consumer has on the health of the U.S. economy.
Does this indicate the American consumer has given up on the US economy? Not exactly. The Consumer Confidence Index, a key measure of optimism on the state of the U.S. economy, was just reported at 117.9, reflecting a recent level of consumer optimism not seen since December 2000. The index has a benchmark of 100. Anything above 100 indicates optimism on jobs and income by consumers, who ultimately will spend money and stimulate economic growth. Unfortunately, this optimism simply hasn’t translated into increased spending.
Therein lies the dilemma for the financial markets and the Federal Reserve, which has the task of implementing America’s monetary policies; a consumer who feels confident in their financial future but won’t solidify that conviction at the checkout line.
The Federal Reserve is counting on the American consumer to kick into higher gear in the upcoming months. Until they do, America’s piggy banks continue to gain weight.