I said last month we know why the US economy is still growing. Consumers have kept spending. The second revision of second quarter economic growth confirmed this when Gross Domestic Product growth jumped from 2.4 to 3.0 percent!
“Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2024, according to the “second” estimate. In the first quarter, real GDP increased 1.4 percent.”
This is huge, but the question remains just how much longer consumers can ‘stay in the game’ before their chips run out, to parrot a well-known remark Roosevelt’s Fed Chairman Marriner Eccles made in testimony during the Great Depression.
Consumer spending was revised up to a 2.9% rate from the initial estimate of a 2.3% gain in the report. Whereas spending was up 1.5% in the first three months of the year, and such activity accounts for two-thirds of US economic activity these days. So, it’s extremely important to track how long they can continue to spend, as well as save.
Consumer confidence is rising again, which should help sustain the rally, as consumers seem to be worrying less about their job, per the Conference Board, even though personal savings have declined to dangerous lows.
“The Conference Board Consumer Confidence Index® rose in August to 103.3 (1985=100), from an upwardly revised 101.9 in July. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—improved to 134.4 from 133.1 in July.”
That’s a small improvement, but far below the 120 to 130 pt. index range prior to the pandemic. It says consumers are still shaking off the effects of the pandemic, for starters.
One reason for their uncertainty is household incomes have fluctuated wildly for decades due to the various recessions. Household income growth plunged to -0.1% at the beginning of the COVID-19 pandemic and was only back up to its +5% pre-pandemic highs in 2022, the last year it was calculated.
Household incomes have barely kept up with inflation, in other words, never able to get ahead of the longer term 2% average inflation rate that has prevailed since the Great Recession.
This in fact highlights the dangers consumers face going forward. They continue to borrow heavily, even with historic high interest rates, to ‘stay in the game’ to maintain their current lifestyles.
Their personal savings rate has just plunged from 3.4 percent to 2.9 percent, according to the BEA. It was lower only once since 1960—to 1.4 percent in July 2005 during the housing bubble and runup to the Great Recession.
Is there any reason to believe things will improve for the majority, when the Fed does cut interest rates? There have been recommendations, such as the child tax credit that both parties want to reinstitute; also lowering taxes on middle incomes and raising it for corporations and the wealthiest; as well as taxing the earnings of hedge fund managers managing $trillions in public monies.
Let us see if more of the economic pie will be distributed to those that have no savings left. Otherwise, we already know what happens when consumers can no longer stay in the game and their chips run out.
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
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