The labour market and the consumer are powering the U.S. economy forward amid ongoing global growth worries. And because of the health of households’ balance sheets, the chance of a recession remains low.
“Labour market conditions improved further even as economic growth slowed late last year,” said the Federal Open Market Committee (FOMC) in its Jan. 27 statement. This is a good omen for consumer spending to remain at a healthy level.
The strong position of U.S. households’ balance sheets provides a good counterbalance to the weakness seen in other parts of the U.S. economy, says Millan Mulraine, Deputy Chief U.S. Macro Strategist at TD Securities USA in New York.
“Any thought of a recession at this point is premature,” Mulraine tells Epoch Times. “Consumer spending will remain a lynchpin for U.S. economic activity.”
Consumer confidence has been rebounding at a time when financial markets have seen unprecedented January turbulence.
“Upbeat consumer confidence supports our forecast that household spending growth will rebound in early-2016 after moderating to an expected 2.0 percent annualized pace in the fourth quarter of 2015,” according to a Jan. 26 RBC commentary.
Quite in contrast to Canada where leverage measures are at record highs, the U.S. consumer has been far more responsible. U.S. households have been saving steadily between 4 to 6 percent over the past few years.
“U.S. consumers are less dependent on credit than they have been in the past,” says Mulraine. “That’s why in terms of housing market activity, you see mortgage debt hasn’t risen as much as one would have thought given the level of monetary stimulus and the low level of rates.”
But the key question for Mulraine is, given the international concerns about growth—namely China—how well will U.S. consumer spending support economic growth? Mulraine believes consumer and households’ financial positions allow them to “at least maintain this level of consumption for some time and that will provide a big offset to the drag from external sectors.”
The buoyancy in labour markets and low energy prices add to the positive backdrop of deleveraging households.
“We expect consumer spending grew at its fastest pace in nearly a decade,” said RBC about consumer confidence in 2015.
Risk Assessment
The Fed added “The Committee is closely monitoring global economic and financial developments” to its statement, given the turbulence in financial markets to start 2016.
Along with a downgrade of inflation, the Fed removed a line from December’s statement about its assessment of the balance of risks.
This was a notable omission given that the Fed has always had a view on the balance of risks, says Mulraine.
“So if I were to read the tea leaves, then everything is up in the air right now,” says Mulraine. He also believes risks will be tilted to the downside now rather than the upside.
It’s an indication that the Fed will be less aggressive with rate hikes than they thought they'd be in December. Back then, the dot plot indicated four rate hikes for 2016, but now that seems more unlikely than ever.
Mulraine thinks two hikes is probably the right number. “I think the Fed will probably wait for June to hike then and see how things evolve globally and in the U.S. before they move again.”
But in no way has the Fed ruled out raising rates in March even with the dovish statement.
Regarding the U.S. economic weakness from late 2015, the Bank of Canada believes it to be temporary.
On Jan. 20, the BoC published its latest quarterly projections. It expects the U.S. economy to grow at close to 2.5 percent this year, pointing to strong gains in employment and high consumer confidence.
“Expansion in the United States is on track, despite temporary weakness in the fourth quarter of 2015,” according to the BoC’s press release.
However, the BoC noted consumers are saving more of their income gains than expected.
While the Fed’s view on the economy is murkier now, the strength of the consumer is undeniable and is expected to help weather any storm.
Follow Rahul on Twitter @RV_ETBiz
