Shoppers Won’t Save the U.S. Economy

(Bloomberg Opinion) -- Reports of strong sales on Black Friday and Cyber Monday have strengthened the case that consumers will continue to be the engine of growth for the U.S. economy. The resilience of the American consumer, goes the theory, will stave off a recession.

That confidence may be misplaced.

There are two problems with putting too much faith in consumer-driven growth. First, as my colleague John Authers has observed, the underlying strength is slowing. Second, consumers are traditionally lagging indicators of economic weakness. Business cycles are driven by investment in housing and business. By the time consumer spending begins to weaken, it is too late.

And consumer spending, like overall GDP, peaked in mid-2018 and has been declining ever since. The decline has been shallower than that of business investment, so consumer spending has exerted a moderating force on overall growth. But the trajectory is still downward, and it is nearing levels that prevailed in 2016 and 2017.

Without any contribution from the rest of the economy, consumer spending at its current levels could support GDP growth of only about 1.5% a year and average monthly job growth of about 60,000, which would be the weakest job growth since late 2010. By comparison, the U.S. economy has created an average of 147,000 jobs per month over the past 12 months.

Weak job growth, in turn, could undermine consumer sentiment, setting off a downward spiral. In fact, that is how recessions typically progress: In two of the last three recessions, consumer comfort was within a few points of its peak in the month the recession began.

The idea that consumer spending is rising as a percentage of GDP, far from being a sign of strength, is actually a warning. A consumer-driven economy is particularly vulnerable because while job losses in the rest of the economy can have large effects on consumer confidence, bumps in consumption growth have far less effect on other sectors of the economy.

That doesn't mean the U.S. economy is doomed. Both residential investment and business investment have been hit so hard this year that a return to tepid growth would constitute a significant turnaround.

There seem to be signs of that in the housing market. Housing starts are increasing, and the recent cut in interest rates by the Federal Reserve should help. The early signs on business investment are mixed, with some measures reporting a rebound in manufacturing and others continuing to show a decline.

What's clear is that counting on the consumer alone to drive the economy is a risky proposition. Without an increase in investment, exports or government spending — or additional tax cuts — the risk of recession will continue to hang over the U.S. economy in 2020.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

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