Call it America’s $11 trillion advantage: Consumer spending is likely to steer the U.S. economy safely through the shoals of deteriorating global growth and turbulent financial markets.
The combination of more jobs, falling gasoline (NYMEX:RBZ14) prices and low borrowing costs will help lift household purchases. Such tailwinds probably matter more than Europe’s struggles or the slackening in emerging markets that caused the Dow Jones Industrial Average last week to erase its gains for the year.
“We’ve got a lot of things working in favor of the consumer right now,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, at IHS Inc. “To have that kind of strength is the biggest asset for the U.S. It’s a pretty rock solid footing.”
Household purchases make up almost 70% of the $16.8 trillion U.S. economy and have climbed an average 2% in the recovery that’s now in its sixth year. Spending growth will accelerate to 2.7% next year after 2.3% in 2014, according to the latest Bloomberg survey of economists.
The poll, taken from Oct. 3 to Oct. 8 in the midst of the meltdown in equities, showed little change in the median projections from the prior month. The economy is forecast to expand 3% in 2015 after 2.2% growth this year, according to the survey.
“We’ve got the proverbial 800-pound gorilla—the consumer,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Households are more fixated on the good news here, and a big part of that is the labor market. The U.S. is going to be pretty immune to the rest of the world.”
Economic weakness in Europe, slowing growth in China and tensions in the Middle East sparked a $3.5 trillion loss in value for global equities through last week since a record in September. Brent crude oil yesterday sank to an almost four-year low and the dollar (NYBOT:DXZ14) has climbed almost 5% since June.
The International Monetary Fund cut its forecast for international growth in 2015 and said the euro (CME:E6Z14) area faces the risk of a recession. The Washington-based lender trimmed projections for emerging markets including Brazil and Russia, while raising them for the U.S.
“In a slowing global growth environment, a consumer-dependent economy is a good thing,” said Dean Maki, chief U.S. economist at Barclays Plc in New York and a former Federal Reserve economist who specialized in researching household finances. “Resilient” spending is one reason “the U.S. outlook remains positive.”
Cheaper prices at the gas pump and lower home-heating bills will allow Americans to stretch their paychecks, and history shows the potential dividends.
In the late 1990s, growth and household purchases picked up as global oil prices weakened more in the aftermath of the Asian financial crisis, Maki said. Consumer spending climbed 4% a year on average in the decade ended 2001, the strongest since the 10 years through 1974. Oil plunged 72% from its 1990 peak to late 1998.
This year, the cost of crude has slumped 21% since a June high as supplies build and overseas demand cools.
“That bolsters our view that U.S. consumption will be solid even as growth slows elsewhere,” said Maki, who projects consumer spending will accelerate to 3% in the second half of 2015, after increasing 2.5% in each of the prior four quarters.
The average nationwide price of a gallon of gas is down 13% from a high in April, figures from AAA, the largest U.S. motoring organization, showed. A 15% drop reduces consumer prices by 0.75 percentage point and boosts spending power by $60 billion, at an annual rate, according to Morgan Stanley research published Oct. 10.
Along with cheaper fuel bills and progress in the job market, households have seen their wealth surge by $15 trillion in the past two years, Peter D’Antonio, an economist at Citigroup Global Markets Inc. in New York, wrote in a research note. What’s more, for the first time in four years fiscal policy won’t be a drag on incomes, another reason spending may grow 3% or faster in the coming year, he said.
Wage growth will pick up as monthly hiring gains averaging 227,000 so far in 2014 outpace last year’s 194,000, D’Antonio said. Disposable income, or money left over after taxes and inflation, has climbed an average 2.5% this year, more than the 1.5% since the recovery began in June 2009.
Fed officials are nonetheless growing more concerned about the recent turmoil in financial markets, with some indicating they may push back the timing of any interest-rate increase.
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.