It has become clear that with U.S. corporate profit growth on the ropes, it's up to continued spending by consumers to protect the U.S. economy from a slowdown. But data released on Monday suggest shoppers are pulling back, putting the entire recovery at risk.
You see, with net exports, corporate investment and government spending all acting as drags on GDP growth for various reasons -- largely, low commodity prices and the dollar's recent strength -- the burden has been on American shoppers to reinvigorate things. Much has been going right for them: Energy is cheap, job growth has been strong and stocks have rallied to challenge three-year highs.
Yet all across this country, wallets are snapping shut, pushing the savings rate to levels not seen since 2012.
As a result, the Federal Reserve Bank of Atlanta marked down its first-quarter GDP growth estimate to just 0.6 percent -- from 1.4 percent previously and 1.9 percent last week (chart below). This is also down from the 2 percent GDP growth rate posted in third-quarter 2015, the 2.2 percent average growth rate seen in the first three quarters of 2015 and the 2.4 percent advance seen in 2014.
The problem is that strength in consumer spending (primarily on services) is fading despite relatively stable income growth. Shoppers simply remain cautious at a time when they need to be aggressively offsetting the slowdowns in corporate profitability and factory activity led by falling labor productivity, rising labor costs, low energy and commodity prices, and currency volatility.
Stifel economist Lindsey Piegza wrote in a note to clients that the consumer "appears to be on still-fragile, albeit still-positive, footing despite stagnant wage growth, only modest improvement in the jobs market and limited confidence surrounding the sustainability of the U.S. recovery."
Monday's spending data included a downward revision to January's numbers that dropped a 0.5 percent month-over-month surge to a paltry 0.1 percent expansion -- the weakest result in over a year.
Capital Economics now estimates first-quarter real consumption growth is likely to clock in at around a 2 percent annualized rate, down from a 2.4 percent rate the fourth quarter of 2015. The firm says that's a "disappointment given that employment continued to grow at a solid pace in the first quarter, and households enjoyed a further boost in purchasing power from even lower energy prices."
The trouble is that since the second half of 2010, according to Ed Yardeni of Yardeni Research, U.S. economic growth has been near its historical "stall speed" of around 2 percent -- a subdued level of growth that has tended to tip the economy into recession. Each of the last 11 recessions was preceded by a drop in real GDP growth to 2 percent.
The continuation of the Federal Reserve's ultra-cheap monetary policy has kept things going. But that's under threat now as the Fed continues to hint at further rate hikes in response to a low unemployment rate and evidence inflation is firming.
A turnaround in economic growth still depends on consumers spending more freely. Up to this point, increases in health care outlays have been where the action is. Moving ahead, we'll need to see this broaden to areas such as housing. At least there's some good news here: In fourth-quarter 2015, residential fixed investment grew 10.1 percent, up from 8.2 percent in the previous quarter.
Let's hope it continues as winter's chill fades and we move toward the spring and summer home-buying season.