Recession warnings are looking flat wrong as consumers power the economy forward
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For all the sense of angst about the U.S. economy of late, the American consumer continues powering growth forward.
- New data out this morning confirms that trajectory continued through late summer.
Why it matters: All those recession warnings from earlier in the year are looking flat wrong. When consumers keep spending (which they are) and businesses keep investing (which they also are), the economy can't — almost as a matter of arithmetic — fall into a contraction.
Driving the news: Personal consumption expenditures rose 0.6% in August, the Commerce Department said this morning, or 0.4% adjusted for inflation.
- The spending bump was particularly strong for physical items, with a 0.8% rise in both durable and nondurable goods.
- Personal income rose as well, though only by 0.4%, meaning that the higher spending was fueled by a lower savings rate.
By the numbers: The Atlanta Fed's GDPNow model sees a blockbuster 3.9% rate of GDP growth for the third quarter, which ends next week.
- It follows on the heels of revisions to second quarter GDP, released yesterday, that showed much stronger consumer spending in the April through June quarter than first estimated, and a 3.8% pace of growth.
What they're saying: "After they hunkered down in the spring, recent data show consumers resumed spending over the summer, especially those with higher incomes," said Richmond Fed president Tom Barkin in a speech this morning at the Peterson Institute for International Economics.
- "And why wouldn't they?" Barkin continued. "Unemployment is still low, nominal wages are still increasing, and asset valuations are near all-time highs."
The intrigue: Consumer sentiment measures have been depressed lately, especially among lower-income groups. The labor market is showing meaningful cracks, particularly in the pace of job creation.
- As our colleague Emily Peck has reported, there is a range of evidence indicating that it is affluent Americans propping up spending, even as lower-income people are pinching pennies more.
- Those low-income groups are less likely to have rising wealth thanks to the booming stock market, and more likely to be financially stressed by tariff-fueled inflation.
- Confirming the bad vibes, the University of Michigan consumer sentiment survey for September, out this morning, fell 5% from August and is down 21.6% from a year ago.
Yes, but: The overall economy — which is a story of averages and aggregates rather than how things feel, or how different segments of the population are doing — looks just fine.
The bottom line: "The economy has continued to surprise to the upside, and despite the negativity captured in surveys and expressed by commentators, actions speak louder than words and consumers continue to spend," writes Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a note.
