Can the American consumer ride to the rescue of a troubled global economy?
Consumers remain the key to a sustained rebound by the world's largest economy. And with recent employment gains, rising disposable incomes, lower household debt and increased optimism, they appear poised to return to the malls in force.
The comeback of the consumer has been long awaited by manufacturers, distributors and retailers of myriad goods and services in the U.S. market. Getting them back to something resembling their old free-spending ways is also the fervent hope of economy planners around the globe.
Consumers still account for at least two-thirds of the U.S. economy and continue to drive domestic growth. But Canada and other exporting countries need them, too. And after a long, slow climb out of the abyss of the Great Recession, they appear to be heading in the right direction.
"Increasingly, the world economy is once again dependent on U.S. consumers," said Ed Yardeni, president of Yardeni Research in Glen Head, N.Y. "Clearly, China's losing its momentum, and the world economic outlook would be quite dire if it wasn't for the U.S. economy in general and the U.S. consumer in particular."
We should get a clearer sense of the American mood on Friday when the University of Michigan releases its closely watched consumer sentiment index for September. Analysts expect a slight improvement from an unexpectedly downbeat preliminary survey of 85.7 earlier in the month – down sharply from 91.9 at the end of August – which put optimism at its lowest level in a year.
The 100-point index tends to be volatile, driven up or down by such key mood-changers as the health of the labour market, the direction of the stock market and gasoline prices. And analysts point out that sentiment surveys aren't necessarily a good indicator of spending trends.
"Higher levels of confidence tend to correlate with a quicker pace of retail sales, but this didn't hold in the first quarter, when consumer spending was weaker despite higher confidence readings," said Tim Quinlan, an economist with Wells Fargo Securities in Charlotte, N.C.
Shoppers might have been feeling better about the state of their financial affairs, but dreadful weather conditions across a large swath of the United States kept their wallets closed.
The weak preliminary September reading "probably reflected the volatility in the stock market," Mr. Yardeni said. "Maybe the sentiment took a sympathy swoon with the stock market, but I don't think it's going to have any impact on consumer spending."
Continuing market turmoil is bound to remain a factor.
Since its launch 37 years ago, the Michigan index has averaged 87.5 during years with no recessions.
During five slump-ridden years for the U.S. economy, the average fell to 69.3. The early September reading was the first this year to fall below 90.
That's impressive, considering that in the housing bubble era, the index averaged 89.1 between 2003 and the end of 2007.
Before the bubble burst, U.S. consumption expanded at a clip of close to 4 per cent annually. Since the ensuing Great Recession ended in early 2009, the consumer has shown occasional signs of life, only to rein in spending again over worries about jobs, incomes, troubles in China and heavy mortgage, student and other debts.
Today, "you won't see real consumption growing 4 to 5 per cent, but it will range from moderate to respectable," said Steve Murphy, a U.S. economist with Capital Economics in Toronto.
"We're looking for real consumption growth to be around 2.5 to 3 per cent [annualized] for the remainder of the year. … There's nothing suggesting the consumer is going to nosedive any time soon. Everything seems favourable."
Among the positive signs, U.S. job openings, a key measure of labour market health, climbed to a record 5.8 million at the end of July, according to a U.S. Labour Department report. Layoffs fell to their lowest level since last November.
Other gauges of consumer sentiment, such as the U.S. Conference Board's monthly index and the weekly Bloomberg consumer comfort index, are showing similar signs that the gloom may be lifting. The next Bloomberg reading is due Thursday.
Not coincidentally, U.S. retail sales have risen for six consecutive months, driven by lower gasoline costs and cheaper imports stemming from the strong U.S. dollar.
Mr. Yardeni cited "clear signs that the windfall from lower oil prices is reviving the miles of driving that people are doing. Vehicle miles have been increasing sharply over the past year. And I have to believe that when people get in the car to go someplace, somewhere along the way they're going to stop to do some shopping."