WASHINGTON (MarketWatch) — The U.S. economy is revved up and ready to go by most measures except for, perhaps, the most critical one: The consumer.
And that’s a problem.
Consumer spending is the fuel that runs a modern economy. Oh sure, businesses have to invest and hire to get the party going, but consumer spending generates more than two-thirds of the nation’s economic activity.
When they spend more, businesses hire and invest more. Yet since the recession ended in mid-2009, consumers have been unusually shy. Americans are only spending about two-thirds as much as they used to and that’s kept U.S. growth well below its historical norm.
Meager wage gains, a devastated labor market and deep scars from the Great Recession clearly played a part in suppressing the urge or ability to spend.As of May consumer spending is climbing at just a 2.9% annual pace, the slowest rate in five years. And a key bellwether of whether Americans are spending more, retail sales, hasn’t show much pop.
“For the economy to really kick into the next gear, we need the consumer to do more of the heavy lifting,” said Ryan Sweet, senior economist at Moody’s Analytics. “For many consumers it still feels like a recession.”
The retail sales report for June, released Tuesday, could offer further clues on whether consumers are starting to feel more optimistic. Economists predict sales will rise by a healthy 0.6%, but more important is whether other sectors aside from fast-growing auto and Internet retailers show renewed strength.
Many of them have lagged behind in 2014. Also on the docket this week are reports on new home construction, manufacturing and consumer sentiment. Federal Reserve Chairwoman Janet Yellen will also field questions from Congress on Tuesday and Wednesday and probably find herself under scrutiny from both the political right and left just months before a critical midterm election.
Conservatives want the Fed to intervene in the economy less, liberals want the central bank to do more to boost growth and reduce inequality. “The Fed is a real convenient punching bag,” said Paul Edelstein, director of financial economics at IHS Global Insight.
What’s in store for retailers
The U.S. retail industry is a tale of two halves. Some retailers, mainly those that sell cars or goods over the Internet, are posting strong growth. Car sales in June, for example, hit an eight-year high as more Americans take advantage of good deals and low interest rates to replace aging vehicles
Other retailers have experienced flat or even declining sales, such as stores that sell men’s clothes or hobby items. “Consumers are spending, but it seems like they are only spending more on autos,” Sweet said.Early returns from individual retailers paint a drab picture for June.
The Gap GPS -0.84% , Container Store TCS +0.88% and Family Dollar FDO +0.21% all posted disappointing results. Even industry giant Wal-Mart WMT -0.21% has had somewhat of a struggle, with sales at stores open at least a year falling for five straight quarters.
A top company executive said in a TV interview that a falling U.S. unemployment rate has done little to boost sales.Container Store Chief Executive Kip Tindell, meanwhile, asserted that most retailers are hitting headwinds.
“While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014. So we’re not alone in this,” he said. What’s holding consumers back?
Stagnant household incomes are one thing. Incomes are up just 1.9% over the past 12 months after taking inflation into account.
By contrast, incomes rose an average of 3.3% annually in the 25 years before the Great Recession. Average hourly earnings, adjusted for inflation, are even worse. They haven’t risen at all in the past 12 months, as of May.
Americans are also reluctant to ring up large debts again after whittling them down over the past few years and putting their household finances in much better shape. They are paying off more of their credit-card debt on time, for example, than at any point in nearly two decades.
“There is a general disinclination to take on a lot of debt,” Edelstein said. “Even though job prospects are improving, households don’t want to forfeit the gains they’ve made.”
The caution is evident in how Americans shop. More consumers wait for sales before going to a store or bypass them entirely if they find a better price on the Internet. Many retailers have reported a drop in foot traffic. There are some signs consumers are loosening up.
The use of credit cards — a sure sign of confidence in the economy— has perked up over the past few months. “It’s something we need to keep an eye on,” Edelstein said.
“It might be a turning point.” A sustained increase in credit-card debt, of course, has to be supported by more hiring and eventually faster wage growth.
Some industries are reporting greater difficulty in filling open jobs, and if the unemployment rate continues to fall from its 6.1% rate, wages are virtually certain to accelerate. Only then will the economy finally be poised to bust free from its postrecession torpor.
marketwatch.com
And that’s a problem.
Consumer spending is the fuel that runs a modern economy. Oh sure, businesses have to invest and hire to get the party going, but consumer spending generates more than two-thirds of the nation’s economic activity.
When they spend more, businesses hire and invest more. Yet since the recession ended in mid-2009, consumers have been unusually shy. Americans are only spending about two-thirds as much as they used to and that’s kept U.S. growth well below its historical norm.
Meager wage gains, a devastated labor market and deep scars from the Great Recession clearly played a part in suppressing the urge or ability to spend.As of May consumer spending is climbing at just a 2.9% annual pace, the slowest rate in five years. And a key bellwether of whether Americans are spending more, retail sales, hasn’t show much pop.
“For the economy to really kick into the next gear, we need the consumer to do more of the heavy lifting,” said Ryan Sweet, senior economist at Moody’s Analytics. “For many consumers it still feels like a recession.”
The retail sales report for June, released Tuesday, could offer further clues on whether consumers are starting to feel more optimistic. Economists predict sales will rise by a healthy 0.6%, but more important is whether other sectors aside from fast-growing auto and Internet retailers show renewed strength.
Many of them have lagged behind in 2014. Also on the docket this week are reports on new home construction, manufacturing and consumer sentiment. Federal Reserve Chairwoman Janet Yellen will also field questions from Congress on Tuesday and Wednesday and probably find herself under scrutiny from both the political right and left just months before a critical midterm election.
Conservatives want the Fed to intervene in the economy less, liberals want the central bank to do more to boost growth and reduce inequality. “The Fed is a real convenient punching bag,” said Paul Edelstein, director of financial economics at IHS Global Insight.
What’s in store for retailers
The U.S. retail industry is a tale of two halves. Some retailers, mainly those that sell cars or goods over the Internet, are posting strong growth. Car sales in June, for example, hit an eight-year high as more Americans take advantage of good deals and low interest rates to replace aging vehicles
Other retailers have experienced flat or even declining sales, such as stores that sell men’s clothes or hobby items. “Consumers are spending, but it seems like they are only spending more on autos,” Sweet said.Early returns from individual retailers paint a drab picture for June.
The Gap GPS -0.84% , Container Store TCS +0.88% and Family Dollar FDO +0.21% all posted disappointing results. Even industry giant Wal-Mart WMT -0.21% has had somewhat of a struggle, with sales at stores open at least a year falling for five straight quarters.
A top company executive said in a TV interview that a falling U.S. unemployment rate has done little to boost sales.Container Store Chief Executive Kip Tindell, meanwhile, asserted that most retailers are hitting headwinds.
“While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014. So we’re not alone in this,” he said. What’s holding consumers back?
Stagnant household incomes are one thing. Incomes are up just 1.9% over the past 12 months after taking inflation into account.
By contrast, incomes rose an average of 3.3% annually in the 25 years before the Great Recession. Average hourly earnings, adjusted for inflation, are even worse. They haven’t risen at all in the past 12 months, as of May.
Americans are also reluctant to ring up large debts again after whittling them down over the past few years and putting their household finances in much better shape. They are paying off more of their credit-card debt on time, for example, than at any point in nearly two decades.
“There is a general disinclination to take on a lot of debt,” Edelstein said. “Even though job prospects are improving, households don’t want to forfeit the gains they’ve made.”
The caution is evident in how Americans shop. More consumers wait for sales before going to a store or bypass them entirely if they find a better price on the Internet. Many retailers have reported a drop in foot traffic. There are some signs consumers are loosening up.
The use of credit cards — a sure sign of confidence in the economy— has perked up over the past few months. “It’s something we need to keep an eye on,” Edelstein said.
“It might be a turning point.” A sustained increase in credit-card debt, of course, has to be supported by more hiring and eventually faster wage growth.
Some industries are reporting greater difficulty in filling open jobs, and if the unemployment rate continues to fall from its 6.1% rate, wages are virtually certain to accelerate. Only then will the economy finally be poised to bust free from its postrecession torpor.
marketwatch.com
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