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Economic Data Shows Weakening Consumers Spending

February 25, 2019

Consumer spending is an important driver of US economic growth. Consumer spending represents approximately two-thirds of all US economic output making it a very important determinate of the health of the US economy. Recently, economic data and other reports show that the strong positive trend in consumer spending may be weakening.

The first sign of trouble came during the fourth quarter earnings season. A number of large retailers reported that the holiday spending season started strong in November 2018 but then weakened significantly in December. Many assumed that these warnings and the weaker than expected earnings that accompanied them were simply an indication of more and more consumers shifting their purchases to online retailers and not an indication of weaker consumer spending. However, in February the US Department of Commerce reported that retail sales declined 1.5% in December showing that holiday sales did in fact fall in the last month of the year. Overall, retail sales for 2018 were still indicative of continued economic growth but the weakness late in the year raised some concerns that the trend may be weakening.

Consumer attitudes also weakened in the later part of 2018. The University of Michigan Consumer Sentiment survey showed that consumer sentiment declined from its previous levels in December and has weakened further in January and February of the current year. The data included a decrease in consumer’s assessment of current economic conditions and their expectations for the future. This has raised some concern that consumer optimism may have peaked in 2018 which may mean that consumers will spend more cautiously in 2019. Often declining consumer sentiment is an early sign that the risk of a recession is increasing.

Typically, labor market data, such as the unemployment rate, initial claims for unemployment insurance, and wage growth have a big impact on consumer spending. The labor market has reported strong data in recent years which has fueled the pace of spending and thus economic growth. However, the national unemployment rate has ticked up recently after many years of a consistent downward trend. The number of weakly claims for unemployment insurance also crept higher in late 2018 and early 2019. So far these data points are still within a range that signals continued economic growth but the short-term trend should be a concern. It also may be a sign that concerns about job security may be contributing to the decline in retail sales and consumer sentiment.

There are also some signs that consumers may be pulling back on spending in favor of paying down debt. Total consumer credit as a percent of economic output declined late in 2018 after eight years of consistent growth following the end of the financial crisis. This could be a sign that consumers are choosing to use more of their free cash flow to strengthen their household balance sheet just in case a recession is on the horizon.

Finally, existing home sales declined 1.2% in January following weak reports in November and December 2018. This may be a sign that housing prices have outpaced household income leading to a lack of affordability or it could be reflecting consumer unwillingness to make large purchases on credit at this point in the economic cycle.

While several months of weak data does not make a trend the breadth of the data across many different economic reports is a concern. It will be important to continue to monitor consumer spending reports in the months to come for signs of the overall health of the US economy.