Kerry Craig

Macroscope | US economy: a slowdown in consumption may not be the only recession factor to watch

The all-powerful American consumer will be tested in an uncertain economy – but the capital expenditure of companies may end up being the determining factor

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Customers wait to enter the grand reopening of a Century 21 department store in New York, US, on May 16. Photo: Bloomberg

Kerry Craig

Published: 12:30am, 20 May 2023

Shopping may well be a national pastime in the United States with household consumption making up around two-thirds of the gross domestic product. So far, consumers have failed to give any impression that the US could be heading for a recession and seem impervious to the drastically higher interest rates.

But with financial conditions tighter and savings stockpiles being eroded, are US consumers finally starting to bend, and will they be pushed to breaking point?

Americans’ propensity to consume is not new and, on aggregate, the US buys more than it actually consumes, with more money than it actually has. In the past, this spending power has helped lift the US economy.

This was true in the March quarter, where consumption was the stand-out feature of a rather lacklustre GDP report. Consumer spending rose by 3.7 per cent year on year compared to 1.1 per cent for the overall economy. That momentum continued into the second quarter as retail sales in April rose by 0.4 per cent month on month, with some of the spending in core categories showing a stronger pickup.

But even the most hardy US shopper may not be able to shrug off what lies ahead. The University of Michigan’s consumer sentiment index highlighted the stress being applied to consumers. Its preliminary May reading fell by 9 per cent compared to the month prior and is 14 per cent lower than its high for the year in February.

The index is only one survey of consumers that is done in the US each month, and the nature of the questions can affect the results. This particular survey places less emphasis on the role of the labour market in how individuals may feel about spending. Most of the questions revolve around personal finances and spending intentions, rather than explicitly on jobs, overlooking the value derived from an extremely low unemployment rate.

A hiring sign in a discount department store in Las Vegas, Nevada, on May 7, 2022. US job gains surged unexpectedly in January while wages rose and unemployment defied expectations to slip further. Photo: AFP