Dollars and Sense: Consumer spending starts the year softly

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One of the best gauges of economic activity to look at is the level of consumer spending. This is because Consumption accounts for about 2/3 of the economy when calculating changes in overall economic growth.

While the preliminary report for first quarter GDP growth has not come out yet, early indications signify that it will not be particularly strong. This is due in large part to the lack of consumer spending, so far this year.

Looking at monthly retail sales figures, they have been down two out of the three months thus far in 2016. The declines are not large, March was down .3%. On a year over year basis they were still positive at 1.7%.

The principal reason for the recent drop in retail sales is a decline in the rate of car purchases. Auto sales account for approximately 20% of the total retail sales number. Auto sales were running at an extremely high rate for much of last year, which makes the comparisons this year more difficult.

Even excluding the auto sales figures, the rest of retail sales is only showing modest increases. This implies that consumers are not willing to increase their spending in a meaningful manner.

What is somewhat surprising about the weaker consumer spending is that it is occurring in an environment of decent job growth and fairly low unemployment. However, wage growth is still rather weak and hours worked have not been increasing, so many consumers are not seeing much in the way of increased disposable income.

Confirming this trend of weaker consumer spending is that consumer confidence surveys recently have not been particularly strong. When consumers are feeling confident they are certainly more likely to spend more.

There have been recent years where consumer spending starts the year slowly, and then picks up later in the year. This may well occur again in 2016. Oftentimes winter weather plays a role in impacting consumer spending during the first three months of the year. However, this year despite some well publicized storms in the East, winter weather nationally was rather mild, so weather should not have impacted spending.

While U.S. consumer spending has been slower thus far this year, our spending levels are still greater than most of the rest of the world. American consumers traditionally have lower savings rates compared to people in most other countries.

For many U.S. consumers spending less and saving more would be a good thing. A significant number of people carry credit card balances, which result in hefty interest charges. In addition a significant number of individuals have only modest balances in their retirement accounts, so saving more should be a priority.

It is difficult to say if this slowdown in consumer spending will be the start of a trend, or it is just a short term aberration. Because less people are being covered by company pension plans, it is important that individuals without pensions save adequately through their IRA’s or 401K plans.

Because of the importance of consumer spending in our economy, if future spending growth is modest that will likely limit the growth of our economy. Recent years have witnessed fairly sluggish gains in economic growth, and that will likely continue unless there are significant changes in productivity.

We will likely see some improvement in the rate of consumer spending, as the year progresses. This is based on the assumption of continued employment growth and some increase in wage growth. However, longer term rates of growth in consumer spending will probably be less than we have seen previously.]