WASHINGTON—U.S. consumers, who are underpinned by a thriving labor market, continue to drive economic expansion, against a backdrop of weak business sentiment and recession concerns, according to economists.
Consumer spending accounts for more than two-thirds of U.S. economic activity. It remains the most important component of domestic growth, as the other areas of the economy have started to waver.
Growth in income and wealth have powered consumer spending in recent years, according to Jim Glassman, head economist for JPMorgan Chase’s commercial banking operation.
“Real wage growth is outpacing inflation, raising consumers’ spending power and pushing the household saving rate up,” he wrote in a report.
“The stock market’s capitalization has climbed to a record 1.5 times GDP, lifting household wealth and creating more room for consumption to grow,” he noted, adding that fuel at historically cheap levels is also boosting disposable income.
He concluded that “when layoffs are rare and assets are growing, consumer spending likely will be consistent.”
The U.S. economy grew at 1.9 percent in the third quarter, beating estimates. Weakness in business investment was offset by resilient consumer spending.
U.S. retail sales, however, fell in September for the first time in seven months, raising concern that slowing business investment and factory activity could be spreading to the broader economy.
Retail sales declined 0.3 percent as consumers cut spending on building materials, online purchases, and cars.
According to Glassman, volatility in the retail sector is high and one month’s data “doesn’t make a trend.”
Retail sales made up less than half of consumer spending, he said, adding that other important categories such as health care, housing, and education spending continued to drive the growth.
And the ongoing trade dispute with China hasn’t affected consumption either.
Record Low Unemployment
Increased hiring and the lowest unemployment rate in nearly five decades have encouraged consumers to spend more. However, this trend could reverse if the slowdown in business activity causes a slump in hiring.Employers across the United States added nearly 128,000 jobs in October, beating estimates of a gain of 85,000 jobs. The unemployment rate inched up to 3.6 percent, which is near a five-decade low, and average hourly wages rose 3 percent compared to last year.
“The consumer is really driving growth,” Federal Reserve Chairman Jerome Powell said at a press conference after the conclusion of the central bank’s two-day policy meeting.
“People who live and work in low-and middle-income communities tell us that many who have struggled to find work are now getting opportunities to add new and better chapters to their lives.”
Powell noted that the weakness in the manufacturing activity, business investment, and exports haven’t affected the consumer side of the economy.
The central bank cut its benchmark federal funds rate on Oct. 30 for the third time this year, to support U.S. economic expansion in the face of a global slowdown and ongoing trade risks that weigh on business confidence.
The Fed slashed its target interest rate by 25 basis points to a range of 1.50 percent to 1.75 percent. It signaled, however, that the current cycle of cutting rates could be over.
