This archive report was first published on 2 July 2019.
Consumers Are Spending. Businesses Aren’t. Who’s Right About the Future? ¶
As the US economy approaches its 10th year of expansion, a disconnect between consumer and business spending has emerged, leaving economists wondering which side is sending the truer signal about the future.
On one hand, American consumers have been driving solid growth through the first half of the year, with consumption spending rising 0.4 percent in May, according to the Commerce Department. Personal income also rose 0.5 percent in May.
However, businesses are sounding a more pessimistic note, citing trade wars and the fading impact of the 2017 corporate tax cuts as holding back investment intentions. Indications about the future are looking gloomy, with numerous surveys of industrial activity declining in their most recent readings.
As a result, American consumers are carrying the burden of keeping the economy out of a significant slump or recession. For the quarter that ended Sunday, Macroeconomic Advisers projects that personal consumption will have risen at a 3.7 percent annual rate, while business spending on structures and equipment will have fallen at annualized rates of 4.6 percent and 4.4 percent.
There were tentative signs of trade peace between the US and China this weekend, which could improve the outlook for businesses. However, the disconnect between the consumer and corporate sides of the economy will eventually end in convergence.
Lydia Boussour, senior economist at Oxford Economics, said, “We’re expecting a gradual cooling in the economy. One concern is that trade uncertainty could filter through to lower consumer and business confidence so that you start seeing a feedback loop that slows the economy more significantly.”
Some evidence suggests that the pessimistic outcome could be on the way, with the latest readings on the labor market showing a significant slowdown in job creation in May and the rate of growth in wages also slowing. Surveys of consumers are also showing warning signs, with the University of Michigan’s consumer sentiment survey showing that Americans’ expectations for the future fell substantially in June.
However, the case for optimism comes from the most recent developments in financial markets and the Federal Reserve. The Fed is poised to cut interest rates, perhaps as soon as late July, which could encourage consumers. The stock market is up about 7 percent from its recent low on June 3, and about 17 percent for the year.
Richard Curtin, the director of consumer surveys at the University of Michigan, said, “Consumers have already indicated in the current month that they felt mortgage rates were becoming more attractive and boosting home-buying conditions. I think they are remarkably attuned to interest rate policy.”
The challenges of the business sector in 2019 look like a repeat of a pattern from 2015, when a rising dollar and slowing overseas economies created deep challenges in export-oriented sectors. However, consumer spending and service industries held up well enough that the overall economy avoided recession.
There are some new wrinkles this time, including trade tensions and a fading impact from fiscal policy. The 2017 tax bill helped increase growth in 2018, but its effects do not seem to be lasting.
One thing the 2015 episode and the 2019 one have in common is timing — the year before a presidential election. The entire economic backdrop to the 2020 race may depend on which is sending the truer signal about the outlook for the year ahead: the free-spending American consumer or the jittery American business.
