- Consumer spending accounts for around 70% of the entire US economy.
- US consumer confidence rose to the highest level since late 2000 in February.
- Sharp downturns in consumer confidence have acted as a lead indicator for economic downturns in the past.
At around 70% of GDP, there is no more important part of the US economy than household spending.
It’s massive, meaning that what consumers think and do is always influential on how the overall US economy performs.
Right now, and despite what appears to be a million headlines that would make you think otherwise, Americans are feeling more than a little confident.
At 130.8, the Conference Board’s Consumer Confidence Index rose to the highest level since late 2000 in February. Apart from the mid 1960s and around the turn of the century, Americans have never been more confident.
Tom Porcelli, Chief US Economist at RBC Capital Markets, says there’s a good reason why that’s the case — pay packets are getting larger for workers.
“Perhaps it’s no coincidence that paychecks for the majority of Americans got bigger in February due to recent tax policy,” he says.
And with that helping to boost confidence even further, Porcelli says that bodes well on the outlook for household spending, and with it the broader economy, based on the relationship between consumer confidence and recessionary periods in the past.
Just look at the chart below.
“When confidence hit these levels in the late 90s the recession was four years away and in the mid 60s it was at least three years away,” Porcelli says.
“Just because confidence today is at very elevated historical levels, it doesn’t mean it cannot go even higher or stabilise at high levels.
“Indeed, confidence at these levels in those aforementioned episodes was more indicative of the end of the mid-cycle stage of the expansion and not a signal that a downturn was imminent.”
If that’s any guide, the current US economic upswing could have a lot further to run yet.
The second reading of Q4 US GDP will be released later today.
The economy is expected to expand by 2.5% on seasonally adjusted annual rate basis, down fractionally on the advanced estimate of 2.6% when consumer spending grew by 3.8%.
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