Most media reports on the U.S. economy, especially those describing the disappointing second quarter real growth figure, point to consumer spending as its one source of strength. On the surface, that is true. But much about American households suggests that this relative strength will fade as the second half wares on.
The last three quarters of overall economic growth certainly have disappointed. According to the Commerce Department, real growth in the gross domestic product (GDP) grew at less than a 1 percent annual rate during last year’s final quarter, even slightly slower during this year’s first quarter, and a somewhat more brisk but hardly encouraging 1.2 percent in the quarter just passed. In each, the consumer provided whatever strength there was. Indeed, were it not for the growth of consumer spending, the real economy would have declined in each of these quarters, by 0.63 percent in 2015’s last quarter, by 0.31 in 2016’s opening quarter, and by 1.63 percent during in this year’s spring quarter. By common rule of thumb, some would have pronounced the economy in recession.
But the consumer will not likely continue this support. The relative strength in spending so far stems entirely from a transitory savings surplus. Since that is now spent, consumer outlays should begin to slow. Unless some other sector of the economy picks up, not especially probable in the present environment, the second half looks set to look worse than the first half and certainly no better.
The savings surplus developed because a brief surge in hiring late last year prompted a leap in the pace of aggregate income growth over the pace of spending growth. Savings flows as a percent of after-tax income rose accordingly from just over 5 percent earlier in the year to over 6 percent by early 2016. Households in this recovery have shown a lot more care about saving than in the past, a natural legacy the great recession of 2008-09. But even for today’s cautious households, a 6.0 percent-plus savings rate invited a pick up in spending. It arrived as 2016 progressed. Even as rates of hiring slowed and income growth decelerated with it to a mere 3 percent yearly rate of expansion, spending during the spring quarter could accelerate as households trimmed the rate of savings back to 5.3 percent of after-tax income.
But now households have exhausted this temporary source of spending strength. On that basis alone, the growth of consumer spending should ebb. Since at the same time a slowdown in the pace of hiring to less than 150,000 new jobs a month gives every reason to expect continued slow income growth, little in the outlook points to much that could support additional spending. Even with some signs of wage increases, present rates of job creation suggest that growth in wage and salary income will likely slow below the 4.1 percent rate averaged during the spring quarter. To be sure, households in the past have gone on to spend at the expense of still lower rates of saving, but more recent behavior suggests that they will remain more cautious than they have historically and so are more likely to trim spending back than pick up the pace.
Since the consumer constitutes some 70 percent of the economy, even this slower pace of spending growth will likely keep overall economic growth in positive territory. But with little else in the economy likely to accelerate — neither capital spending, nor exports, nor government spending at either the federal, the state, or the local level — the quarters coming up hardly promise much overall growth at all.
Thirty Tomorrows 