At the heart of our economy lies the American consumer. Their combined spending accounts for more than two-thirds of all U.S. economic growth. But this driving force requires an optimism on the state of the economy, jobs and income. Ideally, this optimism fuels spending, which in turn stimulates economic growth. Well, in theory, at least. In reality, consumer optimism requires conviction — solidifying that confidence at the checkout line.
Yes, American consumers remain confident. Despite a slight pullback in the Consumer Confidence Index — a key measure of consumer optimism — the index is still approaching an 18-year high. But consumer resources are limited. Money trees don’t exist — sorry, folks. And despite great optimism, the American consumer is still prone to bouts of hibernation.
In December, the nation’s retail sales declined by 1.6 percent, the largest monthly decline in nearly 10 years. Released each month by the U.S. Census Bureau, the retail sales report tracks receipts from stores and merchants, incorporating all in-store, catalogue and internet sales of goods and services. In the first three months of the year, there also tends to be a temporary and seasonal pullback in consumer spending coming off the November-December retail holiday shopping season.
Clearly, in December, consumers slashed their spending despite a relatively high degree of economic optimism, and the first quarter will pose an initial hurdle. This year, the financial markets aren’t expecting a “robust” first quarter from the American consumer. But a respectable showing is needed with evidence of growing strength into the second and third quarters.
The U.S. labor market should continue to provide a tailwind for consumers. The national unemployment rate is at 3.8 percent and should further decline to a 50-year low of just 3.5 percent. Employee wage growth should also remain strong. For much of the past decade, Americans’ wages have been stagnant, with average annual wage growth of just 2.3 percent. But in 2018, wage growth surged to 3 percent, the highest annual average in 10 years. In February, annual growth was reported at 3.4 percent, the largest gain since April 2009.
For the financial markets, there is cautious optimism for consumer spending in 2019. Concerns over rising interest rates have been tempered, and our global trade disputes, especially with China, appear close to resolution. Last year, the American consumer sent the U.S. economy surging. 2018’s growth rate of 2.9 percent matched the highest pace of growth since 2005.
Unfortunately, as recent history has shown, consumer optimism doesn’t always translate to open pocketbooks at the cash register. Americans’ cash and credit resources are limited. And regardless of how rosy an economic outlook is presented, consumers are often prone to withholding that leap of faith in spending their capital.
No, the markets don’t expect Americans to engage in money fights at the local checkout line, throwing balled up wads of cash at each other to simply pass the time. But converting optimism to spending requires conviction. Hopefully that conviction carries over into 2019.