Consumer Spending Hits a 6-Year High
As savings decline and consumer debt increases, the likelihood of future reductions in consumer demand will send shockwaves through the business economy as production will shrink, employment will decline, and recessionary impacts will further reduce consumer confidence. This will impact construction spending and manufacturing investments leading to a downward cycle until we hit a solid core and time allows an economic healing.
Looking ahead, we believe the Tax Cuts and Jobs Act will certainly modify people’s behaviors as companies determine how their revised cash flows will provide options. Ultimately tax cuts drive three behaviors.
- Use reduced tax rates to increase employee compensation
- Reduce consumer prices, or
- Increase shareholder dividends
At the current time, many firms have already increased compensation by providing special bonuses after the new tax cut announcements and some have advised of future dividends. Reducing consumer prices is less prone to happen although Wal-Mart frequently shares reduced costs with their customers, suppliers, and shareholders as their founder, Sam Walton believed in sharing production and technological games with all parties as a matter of fairness.
We have never met anyone who “saved” their way into bankruptcy, however, we have seen the inverse.
The Landscape by the Numbers
Consumer spending climbed 0.4% in December, capping off the biggest increase in household buying since 2011.
Incomes rose 0.4% in December and advanced 3.1% for the full year. But the gain was a much smaller 1.2% if inflation is taken into account — the lowest reading since 2010.
Households drew even more heavily on their savings to fund their purchases. The savings rate fell to 2.4%, the lowest level since 2005.
The rate of inflation over the past year slipped to 1.7% from 1.8%, however. The core rate was flat at 1.5%.
Americans spent more on big-ticket items such as new cars and trucks. They also devoted more of their budget to eating out.
At the same time, consumers spent more to fill up their tanks because of rising gas prices and a bout of cold weather meant higher utility bills.
Inflation, meanwhile, remained relatively tame at year-end, hovering just below the Fed’s 2% target.
Americans increased spending in the final three months of 2017 at the fastest pace in almost two years, reflecting an economy hitting its stride nearly nine years after the end of the last recession.
Soaring stock prices and the best labor market since the turn of the century, highlighted by an ultra-low 4.1% unemployment rate, has given households confidence to spend more money.
Economists don’t expect a big drop-off anytime soon, though they worry that the declining savings rate will eventually force consumers to cut back. They also point out that after-tax incomes aren’t rising all that fast if adjusted for inflation — just 1.2% in 2017. That’s the smallest gain in seven years.
What might keep spending at current levels are the recently passed tax cuts. They are expected to deliver extra cash to 90% of households starting in February and that could boost spending in the months ahead.
The big worry, at least for the Federal Reserve, is inflation. If the PCE gauge shoots past 2%, the central bank could raise interest rates more aggressively. And a higher cost of borrowing could act as a brake on the economy.
Our advice about all of this? Enjoy the benefits of our improved and improving economy while remaining prudent by maintaining a healthy skepticism about its longevity. Save more while the harvest is strong so you can better survive the following slowdown.
As a gentle reminder, we have never met anyone who “saved” their way into bankruptcy however we have seen the inverse.
Now, pay yourself first, save a little more, spend a little less, and take time to enjoy that which we already have.
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