Consumers purchase the newest models of the company’s well-known phones and other products at the Apple Store on Fifth Avenue in New York.
The U.S. economy has enough problems to convince the Fed to lower interest rates last week, but the news isn’t all that grim.
Numerous recent studies also demonstrate that consumer expenditure is still sufficient to support an expanding economy and prevent a recession. Furthermore, although inflation has increased, it hasn’t done so at the rate that experts had anticipated when the trade battles broke out earlier this year.
First, let’s talk about personal spending, which is the primary driver of the American economy. In August, household spending increased for the third consecutive month.
Furthermore, even during the height of the worst trade conflicts in decades, spending in the spring proved to be far higher than first thought. From April to June, spending increased at a robust 2.5% annual rate, which was far more than the initial 1.4% prediction.
In the turbulent first year of Donald Trump’s second term as president, why has spending held up so well?
For starters, incomes are increasing more quickly than inflation. Families have experienced less financial strain as a result, and their money has gone farther.
The economy is still near “full employment,” which economists define as the point at which the majority of job seekers have one, which is one reason why incomes are increasing.
Indeed, hiring has slowed significantly this year. The Fed lowered borrowing costs last week primarily for that reason.
If the pandemic era is taken out of the equation, the U.S. saw the poorest four-month period since 2010 from May to August, with an average of just 27,000 new employment each month.
However, there is a bright side. Businesses aren’t hiring a lot of new employees or filling vacancies, but they aren’t firing a lot of people either.
After losing their jobs, people seek for unemployment benefits, although historically, the weekly total of these so-called unemployed claims has remained relatively low at around 200,000. When the economy deteriorates, they usually increase to 300,000 or more.
Although it has increased slightly to 4.3% this year, the jobless rate is still extremely low. Seldom has the United States experienced a prolonged period of low unemployment below 5%.
Good consumer spending can be largely explained by a steady “low-hire, low-fire” labor market. People will continue to spend as they usually do if they feel secure in their employment.
Of course, the sky is not completely clear. Tariffs haven’t caused inflation to climb as much as anticipated, but Americans still find it extremely offensive.
After nearly hitting the Fed’s 2% target earlier in the year, the inflation rate has now risen toward 3% once more.
A portion of the spending rise can also be explained by higher inflation. Rent, health care, new or used automobiles, auto insurance, and auto repair are among the essentials that Americans are spending more money on.
Because of this, consumer confidence surveys continue to reveal that Americans are uneasy.
According to Joanne Hsu, director of the University of Michigan’s monthly Surveys of Consumers, “Consumers continue to express frustration over the persistence of high prices.” “Consumers feel pressure both from the prospect of higher inflation as well as the risk of weaker labor markets.”
But their purchasing habits haven’t changed despite all the discontent.
After covering their bills, Americans still have money left over to travel, buy leisure items and services, or frequently eat out. In August, a lot of money was spent on such extras.
According to Elizabeth Renter, senior economist at NerdWallet, “people tend to start cutting back on spending when they feel pessimistic about the near-future economy, but that hasn’t been the case thus far.”
Because of how resilient consumer spending is, some economists are even wondering if the Fed should make a significant interest rate cut in the upcoming year given the ongoing inflation.
Dan North, senior economist at Allianz Trade Americas, stated, “There is a risk you could overstimulate the economy and poke the inflation dragon again.”
The Fed may reduce its rate-cutting intentions, according to national economists, but the state of the job market will be crucial.
“A key determining factor will be the outcome of the September employment report released next week,” stated Nationwide.
That’s assuming there is one; a budget dispute between Republicans and Democrats may cause the federal government to partially shut down next week, which might cause the jobs report to be delayed.
