Americans are making more money, finding more jobs and enjoying cheap gas prices. But they’re not spending much...not even during the holiday season.
Concerns are rising that the American shopper won’t be able to save the US from heading into a recession. It’s a big worry given that consumers make up about 70% of the US economy and lately they haven’t been opening their wallets much, CNNMoney reported.
The chance of the US sinking into a full-blown recession now stands at 18%.
A new survey of 51 economists, carried out by the Financial Times, puts the chances of the economy sinking into a full-blown recession at 20%—double of what the country’s top policymaker predicted.
Federal Reserve chair Janet Yellen put the probability of a recession in 2016 at about 10% during her December press conference after the Fed raised interest rates for the first time in years.
She has said repeatedly that she thinks a recession is not on the horizon. The US has enjoyed two years of incredibly strong job growth–the best since 1999–and the economy is expanding at a healthy pace of around 2% a year.
The stock market is off to its worst start ever to a year. China’s stock market is tanking again, pulling much of Europe and Asia into bear market territory. While it’s clear that China’s economy is slowing down, no one is certain just how bad it is.
While the US remains healthy for now, to paraphrase John Donne, “no economy is an island” anymore. There’s a spillover effect.
American stocks plunged into correction (a 10% drop) this month as investors don’t see how US companies can continue to grow a lot when China and so many emerging markets are having issues.
Citigroup predicted a 65% chance of a US recession, a call that was so eyebrow raising that Yellen herself felt the need to swat it away, calling it “absolutely” wrong.
Manufacturing in Recession
Spending fell in December compared to November even though incomes rose a bit, the Commerce Department reported Monday.
“The sum of all recession fears is whether or not the current slowdown in the industrial complex will spill over to the consumer, dragging the economy into recession,” says David Kostin, chief US equity strategist at Goldman Sachs.
US manufacturing is already in a recession. The sector contracted for the fourth straight month in January, according to the key ISM index, which track’s the industry’s growth.
All of this presents a complicated picture of the economy. Some parts of the economy are thriving. Last year, Americans bought a record number of cars. And there was evidence that shoppers are spending on their homes, particularly on big ticket items like kitchen counter tops, dish washers and roofs.
Americans are also finding work: the unemployment rate is a healthy 5%. More young college graduates are landing jobs and their incomes have risen. All of these should reflect positively on the economy.
However, the US economy grew an anemic 0.7% between October and December. It was the slowest pace since the first quarter of 2015.
The fact that gas has fallen below $2 a gallon and Americans still haven’t been spending is worrisome.
Spending Slows
In fact, people are just saving more. Americans collectively saved $753 billion in December, up from $653 billion in December 2014, according to the Commerce Department.
At the same time, personal spending, excluding the volatile things like gas and food, grew at a tepid 1.3%, slower than the 1.5% rate in 2014.
“Spending momentum slowed as 2015 drew to a close and enters the year on a weaker note,” said Jennifer Lee, senior economist at BMO Capital Markets.
Saving money is not a bad thing but the timing isn’t ideal for the US economy. But when consumer spending loses momentum, the economy doesn’t grow.
More Cracks Visible
The global economy too is slowing down, hurting American manufacturing, which makes up about 10% of the US economy.
US trade is getting dragged down by the lack of demand from buyers overseas and the strong dollar, which makes American goods more expensive abroad.
Chances of a recession might be low this year, but more cracks are showing up in the US economy early in 2016.
