Uncommon Sense

Shop ‘til the Economy Drops: Slowing Consumer Spending Could Signal Trouble Ahead

“If you think the United States has stood still, who built the largest shopping center in the world?”

Richard M. Nixon

Michael Arone, CFA
Chief Investment Strategist, State Street Global Advisors

Retail Therapy

Americans love to shop. American Dream, the most expensive US mall ever built, opened last week in New Jersey, complete with theme-park rides and a 16-story ski hill. Who says the mall is dead? Shopping is a national pastime, and our insatiable appetite for goods and services makes the US economy unique. China may be the world’s manufacturer and India its service center, but the US consumer is the world’s undisputed bargain hunter. Our shopping obsession makes some nations green with envy, while others find it disgustingly indulgent.

Regardless, typically, about two-thirds of the US economy is driven by personal consumption. That amounts to roughly $13 trillion in consumer spending superpower. Where would the US economy be without the consumer? Simply, spiraling toward recession. Future economic growth and stock market gains depend on the US consumer’s willingness to keep shopping.

However, a rare shift is under way that will put pressure on the tireless consumer. The Atlanta Federal Reserve GDPNow model is forecasting that underwhelming third-quarter US GDP growth of just 1.8% will be driven completely by personal consumption. Not two-thirds, but 100%. The other three components of GDP —business investment, government spending, and net exports of goods and services —will likely contribute a big fat goose egg to the economy. Zero, bupkis, squat. How can the entire GDP figure be concentrated in a single component?

Alarmingly, while future growth depends on Shopapalooza continuing, we may now be witnessing the peak of US consumer strength. Given that economic and corporate profit growth peaked in the middle of last year, it seems naïve to expect the US consumer to continue to carry the burden of economic growth for too much longer.

The Customer Is Always Right

The US consumer has been strengthened by lower taxes, massive gains in financial assets, a robust job market and falling interest rates. It’s difficult to imagine a more pro-consumer environment.

Economists and market observers continue to point to consumer strength as the primary reason that the US economy won’t finally succumb to recession. Solid evidence supports their view. The US unemployment rate hasn’t been this low in 50 years. Jobless claims are also at multi-decade lows. The stock market is near all-time highs. The reasonably stable housing market is likely to receive additional support from falling interest rates. Measures of consumer confidence remain elevated, with the University of Michigan Consumer Sentiment Index released on October 25 reaching a three-month high. So, what’s not to like?

For the US economy to accelerate, something other than the consumer needs to stimulate growth. Unfortunately, given today’s challenges, it is difficult to identify exactly what that something might be. The global economic slowdown, US-China trade war and contentious US political environment have been major headwinds for the other three components of GDP. And near-term solutions to these major challenges remain elusive. So it’s unlikely that any other GDP component will fill the void of a future slowdown in consumer spending.

A Case of Buyer’s Remorse

This is likely as good as it gets for the consumer. There’s nowhere to go but down for the outstanding consumer data. Recently, cracks have started to form in consumer confidence.Despite the strength shown in the University of Michigan Consumer Sentiment Index, the data reveals that Americans are more cautious about the US economic outlook amid persistent trade tensions and global economic weakness. And a number of additional risks could eventually dampen consumer spending:

  • Plummeting corporate profits. Many measures of manufacturing are now signaling an economic contraction. Rising input costs combined with decelerating top-line revenues are squeezing corporate profit margins. The Bureau of Economic Analysis (BEA) measure of US National Income and Product Accounts (NIPA) profits (before tax) has been flattening. And FactSet earnings data suggests that year-over-year earnings per share growth for the third quarter will suffer its third consecutive quarterly decline.
  • Stagnant income levels. Falling profits mean corporate executives aren’t boosting their hiring plans, increasing capital expenditures or hiking wages. With the pace of job gains slowing this year, the year-over-year average hourly earnings data dipped below 3% for the first time in a while. Not surprisingly, the Commerce Department reported on October 16 that retail sales fell 0.3% in September compared with a month earlier —well short of the 0.2% gain economists were expecting.
  • US-China trade conflict. Investors were quick to celebrate a mid-October preliminary trade agreement between the US and China, but we’ve yet to see specific details of the agreement. And although additional tariffs on Chinese imports scheduled to begin on October 15 have been delayed, more tariffs are scheduled for December 15. According to Reuters, the mid-December tariffs target Chinese goods not previously covered and will hit the consumer technology market hard, including cellphones, laptops and tablet computers, which amounted to $80 billion in imports last year. The December list also includes tariffson a wide range of consumer goods that totaled $156 billion in imports in 2018.1

They Came, They Saw, They Shopped

Consumers’ unabashed optimism has been primarily fueled by the long-running bull market and job growth. Until now, that’s enabled shoppers to turn a blind eye to the global slowdown and tariff wars. However, at the same time the consumer is spending with abandon, corporate America is tightening its belt. Based on a September poll, the Conference Board Measure of CEO Confidence™ registered the lowest reading since the first quarter of 2009. In addition, 67% of CEOs expect economic conditions will get worse, up from 44% last quarter.2

Given the disparity between positive consumer sentiment and negative business confidence, something has to give. If business spending doesn’t pick up, consumer data will likely decline. Already, job gains are losing momentum, income levels are stalling and retail sales are weakening.

The consensus opinion is that the strength of the US consumer will persist and enable the economy to avoid recession. Much of the current consumer data validates that conclusion. However, the limitation of using that data is that it is backward looking. So although lower taxes, financial asset appreciation, a strong jobs market and low interest rates have resulted in still-high measures of consumer sentiment, there are growing signs that not all is well in consumer paradise. The US consumer, the last bastion of economic might, could be in trouble. If that happens, will there be anyone left to hold the bags?


1 Reuters, Factbox: Nearly all goods traded by US and China will have tariffs by December 15, October 10, 2019.

2 The Conference Board, Measure of CEO Confidence, October 2, 2019.


Gross Domestic Product (GDP)

The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard ofthe country’s economic health.


The views expressed in this material are the views of Michael Arone through the period ended October 26, 2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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