We are all consumers, and we are the biggest threat to the US economy.
Currently, economists are forecasting a rebound in second-quarter gross domestic product after a contraction in Q1.
In a recent note, Morgan Stanley chief US economist Ellen Zentner writes that all the usual suspects blamed for the weak quarter — bad weather, the slowdown at West Coast ports, and a possible miscalculation of gross domestic product — are the “low hanging fruits” of obstacles to growth going forward.
That’s partly because many of these factors were seasonal, and economists expect that their effects will not show up again in Q2 GDP.
And so now, it is all about the consumer.
“Given its prominent role in the US economy, the consumer represents both the biggest upside and downside risks to growth,” Zentner wrote in a note to clients last week.
Through the first quarter, economic data showed a consumer that’s spending less than expected. The concern is that this trend, unlike the other factors, will persist. Retail sales data for this year have been dismal. The latest print for April showed that sales were unchanged from the previous month.
In fact, after the data miss in April, one bond trader wrote of the possibility that the economy is entering a recession.
Zentner isn’t so sure, writing, “After a string of disappointing spending data followed by a weak rebound in early spring, we need May retail sales to suggest that consumer spending
has moved onto a better track.”
And on Monday morning, we saw that while personal income rose 0.4% in April, spending went nowhere.
Weak spending has also shown up in consumers saving, instead of spending, the extra money from low gas prices. Many economists, including Zentner, had expected that the windfall would boost spending.
Zentner notes that the Federal Reserve is also concerned about the consumer. In the Minutes from its April meeting, the Fed also noted that low gas prices didn’t boost spending that much:
“Some participants expressed particular concern about this prospect, as their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labour market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand.”
And with the first rate hike dependent on the strength of economic data, it doesn’t help that data on the consumer is weak.
Here’s Zentner’s outlook:
“We remain convinced that the personal savings rate soared too high in 1Q and will decline toward the
previous trend over the course of this year. Rising household financial expectations, supported by the growing belief that lower gasoline prices are here to stay, as well as a broadening out of wage increases, will help US households gain the confidence needed to spend more out of their gas savings.”
We’ll have to wait and see.