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Are US Consumers Shutting Down?

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By Peter G. Hall *  
Vice-President and Chief Economist Export Development Canada

When it comes to sheer clout in the global economy, there are few forces as powerful as US consumers. After all, as a whole, they account for about 14 cents of every dollar that circulates worldwide. When Americans shunned the shops early this summer, it’s no wonder markets weren’t happy. Is the world at risk of a US-consumer-led generalized slowdown?

It was anything but, earlier this year. Retail sales were growing at an 8.5 per cent annualized pace in the first quarter, and were maintaining a 7 per cent six-month clip. Sales then slipped in April and May, and tumbled hard in June, for a total drop of just over 5 per cent – enough to flatten total consumption in the second quarter. A scary development in a fragile global economy.

But wait – gasoline prices were tumbling 15 per cent at the time. Were lower sales just a reflection of softer input prices? Nice try. Adjusted for price movements, retail sales weren’t much different. After rising 5 per cent in the prior six months, real retail sales recoiled by 4.5 per cent in the April-June period. There’s no doubt that US consumers really were in reverse in the last quarter.

Pessimists were all over this, predicting doleful outcomes. In all the gloom, a key statistic was overlooked. Spending may have been down, but savings were up significantly, indicating that income was still intact. A spike in the savings rate is usually a sign of sudden concern. In this case, it occurred in step with the Greek election fiasco, and the resulting fears about contagion in Spain and Italy. It prompted US consumers to hang on to an annualized equivalent of $70 billion they would otherwise have spent – hardly chump change in a turbulent economic environment.

July changed things. Sales rebounded strongly, well ahead of average expectations. The gain was broadly based across spending categories, suggesting stability. Lower gas prices in the middle of the key driving season and calmer European conditions likely helped. Even so, was it just a correction that will fizzle next month? Not likely. Despite the spending surge, savings maintained June’s level.

That’s good news for the coming months. The spurt of summer savings represents potential future spending, once Americans feel that the coast is clear. Higher gas prices may soak some of that up, but it still represents about 0.6 per cent of total consumer spending. Given reasonable underlying growth, this is enough to provide several successive months of solid gains this year.

Sure, there’s no guarantee that a flurry of spending will indeed happen. Although far less indebted than before, consumers are still unusually dour, and can react quickly to negative events. Storm activity in the Gulf states is likely to distort the August and September numbers. But it’s important to remember that spending swings are not mirroring movements in paycheques. Income continues to rise, and higher savings are simply potential future consumption activity. What’s currently in the kitty is enough to give third- and fourth-quarter spending a bigger boost than many pundits are expecting.

The bottom line? Fears of a summer spending shutdown stateside were overblown, and July stats are proof. Overreaction to negative developments will remain a risk to the US consumer outlook until confidence returns to a normal range. Assuming a light near-term crisis list, spending should improve.

 © EDC

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