With Americans feeling as lousy about the economy as they have since the U.S. staved off a near-depression in early 2009, one would imagine consumer spending is similarly plunging off a cliff as well.
Yet new data released on Thursday reveal U.S. consumer consumption continues to be resilient in the face of sluggish job growth, double-dip recession fears, political gridlock in Washington and Europe’s debt debacle. In fact, consumer spending on services accelerated in the third quarter at the fastest pace since the second quarter of 2006.
With the crucial holiday-shopping season looming, the dramatic divergence between consumption and sentiment could be a further sign the U.S. economy has reached a positive turning point and is returning to its modest growth pattern of the past two years.
“Given the pace of deleveraging, the elevated unemployment rate and general nervousness about the economy and politics in Washington, one might think the consumer is eating spam by candlelight in a cave in the woods. Far from it,” Dan Greenhaus, chief global strategist at BTIG, wrote in a note.
Consumer Resiliency on Display
With that in mind, the Commerce Department said Thursday gross domestic product increased by 2.5% in the third quarter. While that was hardly the robust growth one would expect at this stage of a recovery from a deep downturn, it was also not even close to doomsday forecasts over the summer for a contraction.
Eyebrows were raised as the data show increased consumer spending added 1.72 points to GDP growth, the largest positive impact since the end of 2010, according to Greenhaus.
To be sure, some of the gains were attributable to less desirable areas such as medical service spending, which was up 5.5% quarter-over-quarter -- the biggest rise since 2002. However, recreational spending was still up 3.2% in real terms and durable goods orders – purchases of big-ticket items like flat-screen TVs – climbed 4.1%.
“The consumer has been a lot more resilient than myself and a lot of other people expected in the heat of the crisis two months ago,” said Russell Price, senior economist at Ameriprise Financial.
Sentiment vs. Reality
However, Americans appear to have grown more depressed about the state of their economy over the past nine months.
The Conference Board’s consumer confidence index plunged to 39.8 this month – the lowest level since March 2009 just before financial markets began to recover from multiyear lows. Likewise, last month a gauge measuring consumer expectations from the University of Michigan’s consumer sentiment index dipped to its lowest level since May 1980.
In some ways, the deterioration in consumer confidence seems to exceed the economic realities of the moment.
After all, few prognosticators are calling for a repeat of 2008 when the U.S. faced its worst financial crisis since the Great Depression. While the economic recovery has been disappointing, GDP is certainly not contracting. The unemployment rate is at uncomfortably high levels above 9%, but the U.S. continues to add to payrolls each month, compared with the hundreds of thousands of jobs evaporating in March 2009.
“There’s a sense that folks are more downbeat than the economic conditions would warrant,” said Josh Feinman, global chief economist at DB Advisors, Deutsche Bank’s institutional asset management arm. “That’s not to say the conditions are good. They’re not.”
It’s clear consumer sentiment has been hammered by a stream of negative developments, highlighted by the political circus surrounding the extension of the U.S. debt ceiling that led to fears of a once-unthinkable default. Morale was also hit by rising worries of a double-dip recession and political paralysis in Europe that exacerbated the sovereign debt crisis.
Thankfully, recent economic reports signal that another recession is likely not in the cards. After a breakthrough emergency summit this week, Europe is finally making serious progress in resolving its crisis as well. Mirroring those developments, financial markets have soared off their 2011 lows and are once again pricing in modest growth – highlighted by Thursday’s 300-point surge on the Dow.
“You had a chorus of people talking about a double-dip recession. I never thought that was true, but now I think it’s decidedly less probable,” said Price.
Perhaps consumers are just showing fatigue from a very tough four years of economic turbulence.
“We’ve been through a lot,” said Feinman. “We had a very bad recession and financial crisis. We had a mediocre – at best – recovery. People are hurting and it’s been going on for years. It takes a toll.”
Spending Despite Gloomy Attitudes
Thankfully, the depressed attitudes haven’t carried over too much into what consumers do when it comes time to actually make purchases. In September, U.S. retail sales grew by 1.1% to $395.5 billion month-over-month and by 7.9% from the year earlier. That marked the strongest growth in seven months.
One area this has been especially relevant has been auto sales, which soared 9.9% in September amid double-digit growth for General Motors (GM) and Chrysler. Part of those gains can be chalked up to a rebound from the March earthquake in Japan that hit supplies, but still it underscores the disparity between spending and sentiment.
“If someone is able to go out and pay $30,000 on an automobile, they are feeling pretty confident about their own financial situation,” said Price.
The divergence can in part be explained by the fact that at least some of the drags on confidence – like the political uncertainty in Washington – aren’t necessarily dragging down the economy significantly.
“You may say you’re concerned about what’s going on in Washington, but if it isn’t actually hitting your job or your income, you may not actually reduce your spending in response,” said Gus Faucher, director of macroeconomics at Moody’s Analytics.
Impact on Future Growth
A dramatic gap between sentiment and spending can signal a course shift for the broader economy. For example, consumer spending stabilized during the first quarter of 2009 as the recession ended even though consumer sentiment continued to plummet.
“I usually look for that at turning points in the economy,” said Price.
Moody’s Analytics projected retail sales, excluding inflation, to increase 6% this holiday season. While that’s down a bit from last season’s 8% jump, it still represents modest growth.
All of this is not to say the U.S. economy is off to the races. The economy and American consumers’ psyche remain in a precarious spot that makes them subject to a shock from a negative geopolitical or financial event.
The next tests are likely to occur in the coming months as the so-called Super Committee attempts to make a deal on cutting the U.S. debt burden and Congress debates another extension in the payroll tax extension.