Experts Study Consumers for Signs of Recession

The global economy depends on consumer spending.

October 18, 2019

DENVER—This week, the International Monetary Fund downgraded its outlook for world growth in 2019 to 3%, the slowest pace since the global financial crisis more than a decade ago, reports the New York Times. Officials blamed the slower growth on stalled trade and investments, leaving household spending as the main support for private-sector growth. Now that is coming under pressure.

U.S. retail sales fell 0.3% in September, the Department of Commerce reported Wednesday. It was the first drop in seven months, as Americans cut back on purchases of motor vehicles, building materials, hobbies and online purchases. In China, shopkeepers report a waning demand for goods that has made them financially cautious. Embroiled in a trade war with the United States, China saw its economic growth slow to 6.2% in the second quarter on a year-on-year basis, its weakest pace in at least 27 years. Chinese car sales declined last year for the first time since the 1990s.

"Our business has not been so good. Fewer migrant workers are coming to our shop, so I might have to save up for another two years before I can buy a car," said Luo Shuzhen, a 48-year-old shop owner in the southern city of Dongguan, who hoped to buy a vehicle this year.

A Bank of Japan consumer index rose to its second-highest level on record in August, evidenced by strong sales of luxury cars, plus a shift to servings of higher-quality beef among the lunchtime restaurant crowd. But at the same time, real wages fell for the eighth straight month, complicating the outlook for consumption that is likely to take a further hit this month when the sales tax goes from 8% to 10%.

German consumers seemed encouraged by recent moves by the European Central Bank to support the euro zone economy. French consumers are similarly encouraged by recent tax relief. But there is evidence that British consumers may be shifting their spending from restaurants and hotels to food to be consumed at home.

Consumption is always a major portion of gross domestic product, accounting for roughly 70% of U.S. output and roughly 60% in China. Ideally, it's balanced with business investments and contributions from trade, which help set the stage for future hiring and expansion.

As it stands, GDP for the 36 countries of the Organization for Economic Cooperation and Development, which includes the United States and much of Europe and accounts for the bulk of the global economy, would have shrunk in the second quarter of 2019 if not for a strong contribution from consumer spending. Future growth will depend on how that holds up in the face of slowing global trade volumes, and particularly how U.S. consumers fare.

Some policymakers have already flagged a possible recession in the U.S. manufacturing sector. Though U.S. unemployment was near a 50-year low of 3.5% in September, job and wage growth both slowed.

"The U.S. consumer is really the pillar of not just the U.S. economy but the global economy. If that pillar starts to weaken then all bets are off," said Gregory Daco, chief U.S. economist with Oxford Economics.

Weakness may be expected to show up early in bar and restaurant sales, he said. As of July, growth in spending at "food services and drinking places" hit its slowest pace in two and a half years and has declined for three months running.

It might seem a narrow issue but "you get from point A to point B in that if people spend less, the restaurants have less revenue, hire fewer people, are careful with wage growth and that will feed back into lower spending, then broaden to other sectors," be it consumer durables like autos or appliances, or business spending on new equipment or software, Daco said.

With record numbers of people working and wages still growing, the immediate future may be all right, keeping the U.S. consumer complex on track. But Thomas Costerg, senior U.S. economist at Pictet Wealth Management, noted that some of his preferred warning signs were flashing. Employment in the trucking industry, for example, has flatlined this year, and when that "is starting to roll over, it is a cause for concern. That is a cyclical part of the economy that is starting to erode," he said.

"I think we are in the last innings of the consumer cycle," Costerg said. "Consumer spending may be strong for two or three quarters, but I am worried there could be a cliff effect" if business spending and investment do not pick up.