The US consumer is the US economy. Weighing in at close to 70 per cent of US GDP, the domestic consumer is the key economic driver.
And we are at a critical point in how the consumer performs in the next two or three months. The ending of some key social welfare supports, combined with a resurgent virus, are quite severe headwinds for US households.
Contained within recent economic numbers are some worrying signs on just how fragile the US consumer may actually be.
While new job numbers continue to improve, recent data fell short of analyst’s forecasts. In August the leisure and hospitality sector — which had very much been the engine of growth – saw zero improvement. This was put down to fewer hotel bookings and lower take up on flights as the Delta variant spread.
This lacklustre performance was already visible in the overall US consumer spending numbers for July released at the end of August. Spending was up by 0.3 per cent, which equates to an additional $42 billion. But this compares to a more impressive growth rate of 5 per cent in March, and within this July number we actually saw a fall in spending on goods — such as clothing, footwear and cars.
Since these numbers, we have had the withdrawal of fiscal support for households and an end to the moratorium on evictions — neither of which are likely to improve consumer confidence!
Special unemployment payments, which had been running at a $5 trillion annual rate in March, have fallen to a $1 trillion rate in July , and set to fall again by year end. The result is that more than 8 million people are now left with no unemployment compensation whatsoever.
Having been hugely supportive, fiscal policy turns into a drag of 3-4 per cent by the end of 2021.
It’s not clear whether eviction rates may now pick up, but Goldman Sachs estimates there may be up to 750,000 new evictions this year in the US, unless Congress implements a further ban.
This is all happening against a backdrop of overall rising Covid cases since mid-June. As a result many businesses are reconsidering the need for employees to travel. As schools re-open, cases have become more prevalent in younger age groups. Some estimate that a quarter of all new cases are children. Given that many school districts adopt an anti-mask mandate, the problem may persist.
Just how much has US consumer confidence been shaken?
There are two respected surveys of consumer confidence in the US, and today they tell broadly the same story. The surveys are produced by the Conference Board, a non-partisan think tank, and by the University of Michigan. Recent readings from both paint a bleak picture. For the Conference Board, consumer confidence fell in August to its lowest level since February. Their index of consumer expectations slumped 12 per cent in the month. The conclusions from the Michigan survey were even worse. Their numbers have also collapsed and point to the least favourable economic prospects in over a decade. Both surveys highlight inflation and Covid as the sources of consumer unease.
However there may be more at play than just levels of disposable income. It goes a lot deeper given how long the pandemic has been going on. The authors of the Michigan survey believe that this extraordinary falloff in sentiment reflects an emotional response from hopes that the pandemic would soon end and lives return to normal, being dashed again and again.
Consumer facing industries are alive to possible poorer prospects. While retailers are currently enjoying a very buoyant “back to school” season, they are aware of the possibility of sales drifting away. Best Buy, the electronic goods giant with over 1,000 stores is guiding for a decline of 3 per cent in its same store sales this quarter. Home Depot, the home improvement store has already seen some drop in traffic. The chief executive of Target, which operates nearly 2,000 stores, believes the hallmark of the second half of 2021 will be “volatility”.
This is a critical and high risk phase for the US economy. This is when the baton is being passed from heavy Federal fiscal support to an economy that should be gathering its own momentum.
A still fragile consumer may cause the baton to be dropped.
Eugene Kiernan is an independent investment strategist and is president of the Chartered Institute for Securities and Investment