by Real GDP growth in the U.S. wasn’t particularly impressive in the third quarter –the 1.5 percent annualized increase came in just shy of the 1.6 percent consensus forecast and way down from the 3.9 percent reading in the second quarter. A look at the components of GDP growth, however, reveals a very positive signal for the future: Consumer spending has been the biggest contributor to GDP in recent quarters, and American consumers are spending enough to make up for stagnating exports and decelerating business investment. Consumer spending rose at an annualized rate of 3.2 percent in the third quarter, down from 3.6 percent in the second quarter, but still quite strong compared to the post-recession average of 2 percent. Breaking down the overall 1.5 percent increase, businesses adding to inventories and net exports were both a drag on GDP growth. Government spending and investment by both businesses and individuals made a modest positive contribution, but the biggest boost by far came from consumer spending on goods and services. Source: U.S. Bureau of Economic Analysis The four major factors that Credit Suisse believes are driving consumption higher suggest that lower-income households are finally starting to feel the benefits of a recovery that technically began in 2009.
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Ashley Kindergan considers the following as important: consumer spending, Credit Suisse, discretionary spending, durable goods, economy, GDP, United States, World Affairs: Features
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Real GDP growth in the U.S. wasn’t particularly impressive in the third quarter –the 1.5 percent annualized increase came in just shy of the 1.6 percent consensus forecast and way down from the 3.9 percent reading in the second quarter. A look at the components of GDP growth, however, reveals a very positive signal for the future: Consumer spending has been the biggest contributor to GDP in recent quarters, and American consumers are spending enough to make up for stagnating exports and decelerating business investment.
Consumer spending rose at an annualized rate of 3.2 percent in the third quarter, down from 3.6 percent in the second quarter, but still quite strong compared to the post-recession average of 2 percent. Breaking down the overall 1.5 percent increase, businesses adding to inventories and net exports were both a drag on GDP growth. Government spending and investment by both businesses and individuals made a modest positive contribution, but the biggest boost by far came from consumer spending on goods and services.
Source: U.S. Bureau of Economic Analysis
The four major factors that Credit Suisse believes are driving consumption higher suggest that lower-income households are finally starting to feel the benefits of a recovery that technically began in 2009. For one thing, employment levels in the states hit hardest by the bursting of the housing bubble are starting to recover. The employment gap between the 20 percent of states that suffered the biggest drop in housing net worth during the crisis and the 20 percent with the smallest decline is narrowing.
Current state-by-state consumer spending figures aren’t available. So it’s impossible to know whether the employment recovery is feeding through into higher spending in what Credit Suisse calls “bubble states.” But indirect measures suggest that it is. Consumers in bubble states are starting to charge more on their credit cards and take out more auto loans. Rising debt levels among subprime borrowers in bubble states are part of a larger trend in which households of all kinds – those with good credit and bad, those in states pummeled by the financial crisis and those in states that remained relatively untouched – have been taking on more household debt. The long-running household deleveraging that began in the wake of the financial crisis started to reverse course in late 2013 and that turnaround is now filtering down to borrowers with less than sterling credit. That directly encourages consumer spending.
Lower-income households have also enjoyed disproportionate relief from the decline in oil prices over the past year. For the lowest-earning 60 percent of households, gasoline made up 7.1 percent of non-discretionary spending after tax, compared to 3.7 percent for the top 40 percent. In aggregate, low gas prices have saved American consumers the equivalent of 1 percent of their total disposable income over the past year. The evidence suggests that consumers are spending that windfall, rather than saving it: Household savings rates have declined dramatically since the beginning of this year, and restaurant spending has soared since oil prices first started to decline in 2014.
Falling gas prices aren’t the only factors encouraging – or, perhaps, allowing – lower-income Americans to spend. Higher income is playing a part, too. The lowest-earning 10 percent of American households have seen weekly earnings grow 2.6 percent a year since 2013, more than double the 0.9 percent annual growth rate between 2009 and 2012. Workers in the two lowest-paid sectors, retail and leisure and hospitality, are working more hours and benefitting from steady growth in payroll income. Those two sectors account for more than 30 million jobs, or one-fourth of private employment.
Credit Suisse believes that this broader recovery is directly responsible for the steady uptick in spending on discretionary items such as clothing, household products, and toys. Lower-income households spend a higher proportion of their income on discretionary goods than wealthier households do, and as their fortunes recover, they seem to be able to spend more on “extras.” That’s a very good sign for the economy, as these kinds of spending recoveries tend to last for a while. Credit Suisse says trends in spending on services and non-durable goods tend to come in “long, slow waves.” Even with the Federal Reserve expected to raise interest rates this year, which could put a damper on consumers’ enthusiasm for buying things they usually borrow money for, such as cars or large appliances, Credit Suisse forecasts discretionary spending will continue to support the strong consumer spending trend.