US economic growth remains sluggish, as last week’s disappointing Q2 GDP report shows, but you can’t blame the weak macro trend on consumers. Personal consumption expenditures continued to increase at a modest rate in June, rising 0.4% for the second month in a row, the Bureau of Economic Analysis reports. The gain pushed the annual pace up to 3.7%, close to the strongest year-over-year advance in nearly a year. There are any number of challenges weighing on the economy, but weak spending on Main Street isn’t one of them.
“The consumer is on a solid track,” says Thomas Simons, an economist with Jefferies LLC. “The momentum is going to continue into the third quarter and is fueled by strength in the labor market.”
But if you’re looking for reasons to worry, the softer year-over-year gains for disposable personal income (DPI) in recent months should be on the short list. DPI’s annual pace slipped to 3.1% in June—the slowest in more than two years. If the slide continues, it’s only a matter of time before the downside bias pinches consumer spending.
On the plus side, private-sector wage growth’s annual growth rate ticked higher, inching up to 3.3% in June. The gain is only marginally higher than May’s advance, but perhaps the increase is a sign that income growth is set to stabilize and perhaps accelerate.
In any case, Joe Sixpack doesn’t seem worried, which is no trivial factor at the moment. The tepid 1.2% rise in Q2 GDP is worrisome, but until or if the consumer sector stumbles the US will probably avoid a recession for the foreseeable future.
As for the anemic GDP increase in the April-to-June period, that was largely due to inventory drawdown. But echoing today’s monthly report, personal consumption expenditures (PCE) show no sign of stress in the quarterly data. In fact, PCE growth rebounded sharply to 4.2% in Q2 (seasonally adjusted annual rate), well above Q1’s 1.6% gain. Gross private domestic investment, by contrast, continued to fall, posting an unusually heavy 9.2% decline in Q2–the third quarterly decline in a row.
All of which leads us to two critical questions. First, will the business sector bounce back in the second half of this year? Hope springs eternal. “Businesses have overdone the inventory reductions, and that is likely to reverse in the third quarter, which will help growth,” predicts Nariman Behravesh, chief economist at IHS Global Insight.
Sal Guatieri, senior economist at BMO Capital Markets, agrees. “Another decent quarter for consumers, together with renewed inventory building, should anchor a near doubling in real GDP growth” in Q3 to 2.3%, he says.
Sounds good, but a strong consumer sector is still essential while we’re waiting for business to rebound, which may or may not happen. A reality check for the consumer outlook arrives next week via the July numbers for retail sales. There’s no reason at the moment to think that spending will stumble in the kickoff to the third quarter. Good thing, too, since US growth is overly dependent on the consumer these days.