[The U.S. stock market, which saw its largest one-day decline of the year Wednesday, has proved highly volatile as Trump’s trade war with China has escalated. Bond markets, which have a strong track record of predicting recessions, are flashing warning signs. And the trade war itself, which for the most part hasn’t hit consumers directly, will begin to do so more forcefully in the fall as tariffs rise on consumer staples including some food and clothing products.]
By
Rachel Siegel , Abha Bhattarai and Heather Long
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Trader
Andrew Silverman works on the floor of the New York Stock Exchange on
Thursday,
the day after the U.S. stock market saw its largest one-day
decline
of the year. (Richard Drew/AP)
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American consumers are increasingly propping
up the global economy, an enduring source of strength that is helping keep the
United States out of recession and drawing a sharp contrast with the rest of
the world.
But as a number of signs point to a possible
downturn in the United States, economists are growing more skeptical that
consumers will continue to open up their wallets as freely. A failure to do so
could hasten the arrival of the first U.S. recession in a decade.
Low unemployment, rising wages and easy
credit have given consumers the confidence and ability to spend in recent
months. That has proved crucial as spending by U.S. businesses has declined,
U.S. manufacturing has fallen into a funk, and the economies of many other
large countries, including Germany, have begun to shrink.
The strength of the consumer has convinced
many business leaders that the U.S. economy won’t go into recession anytime
soon, and it is the basis for optimism at the White House that it will remain
strong into the 2020 election.
“Probably above all else, the consumer is
doing incredibly,” President Trump said Thursday.
Yet a number of developments could shift this
view.
The U.S. stock market, which saw its largest
one-day decline of the year Wednesday, has proved highly volatile as Trump’s
trade war with China has escalated. Bond markets, which have a strong track
record of predicting recessions, are flashing warning signs. And the trade war
itself, which for the most part hasn’t hit consumers directly, will begin to do
so more forcefully in the fall as tariffs rise on consumer staples including
some food and clothing products.
“The consumer is playing Atlas, shouldering the
economy,” said Diane Swonk, chief economist at the accounting firm Grant
Thornton. “But there’s an underlying fragility here. Businesses have already
been scared into pulling back, and now consumers are also walking on
eggshells.”
No single bit of negative news is likely to
dramatically change the outlook of consumers, whose spending drives about 70
percent of the U.S. economy. But collectively — and combined with other
financial anxieties — they could prompt a cycle of fear that leads consumers to
pull back. That’s especially true for the tens of millions of Americans who
have painful memories of the Great Recession, which lasted from December 2007
through June 2009.
One of the most reliable warning signs
arrived Friday, when the University of Michigan’s consumer confidence index
fell to a seven-month low, and the index measuring Americans’ outlook for the
future dropped even further.
It was “the first indication that the U.S.
consumer might not save the world economy after all,” Paul Ashworth, chief U.S.
economist for Capital Economics, wrote in a note to clients.
Trump last week delayed a new 10 percent
tariff on a large chunk of $300 billion worth of Chinese exports that had been
scheduled to go into effect in September. Trump said he didn’t want to
undermine the holiday shopping period, so he pushed about half the tariffs back
to mid-December.
But economists warn that the tariffs that
remain will have an outsize impact on consumers. Previous rounds of tariffs
mainly affected industrial products and raw materials such as steel.
“The tariffs that are going into effect next
month are not insignificant,” Swonk said. “We’re talking about a lot of basics
that people buy at the grocery store — garlic, pine nuts, meats, dairy — that
all come from China.”
Other challenges are also on the horizon.
Historically, consumers have been spooked by a falling stock market and a
decline in hiring. The job market has been red hot, but there are signs of a
hiring slowdown. And growth in paychecks, which had been quite robust last year
and early this year, is slowing as well.
Also, the boost from Trump’s tax cuts may be
fading. The tax cut law passed at the end of 2017 added hundreds of dollars to
many middle-class families’ take-home pay last year, according to the Tax
Policy Center. But economists say the effects of the tax cut were strongest
then, and the stimulus diminishes as Americans adjust to the new norm.
“The bottom line is the effects of the tax
cut are fading,” said Torsten Slok, chief economist at Deutsche Bank
Securities. “We’re getting more worried about the U.S. outlook.”
Consumer spending could also prove fragile
since so much of it is reliant on debt. American households have again taken on
large debt loads to fuel consumption, with consumer debt hitting $13.9 trillion
in the spring, more than a trillion dollars above the prior peak, reached just
before the 2008 financial crisis.
The cloud of uncertainty has some consumers
questioning when they should start making changes, and to what degree. The
possibility of another downturn has some shoppers starting to trim pricier
items from their grocery lists or doubting future job prospects.
By most measures, Andrea Maxand says she
feels financially secure. She has a good job, has paid off her credit card
debt, and is making more money than she did a year ago.
But over the past few weeks, she has started
pulling back in small ways. She has brought down her weekly grocery bill from
$160 to $110, and is cutting down on “the frivolous things”: takeout, delivery,
weekend trips to see her favorite bands.
“My situation right now is good,” said
Maxand, who works as a paralegal in Seattle while studying for a graduate
degree in history. “But I’m anxious. I’ve been watching the rumblings of the
trade war. This week, when the stock market tumbled, I said, yup, it’s time to
start budgeting.”
A growing sense of anxiety around a recession
is enough to unsettle consumers, said Mark Cohen, director of retail studies at
Columbia Business School.
People may grow concerned that they’ll lose
their jobs, or that they won’t get the raises they expected. Businesses
affected by the trade war will be “faced with a series of really suboptimal
decisions,” Cohen said, that could include passing the cost of the tariffs on
to consumers.
And if shoppers are hit with an uptick in
prices — say $10 more at the grocery store checkout — people will start to
scale back, particularly those who are struggling paycheck to paycheck, or
nearly so.
“If it’s abrupt or somewhat precipitous,
people will freak out in the consumer space, which happens to be everyone with
a heartbeat,” Cohen said. “And what does that do? It dampens demand.”
Margaret Williford has one year left toward
her master’s degree in public policy and will soon be on the job hunt. She
plans to scout for openings at nonprofit organizations advocating for women who
have been victims of violence, and has been thinking primarily about going to a
large city that may come with pricier rent.
But Williford, like many of her fellow
graduate students, is starting to wonder if she’ll be entering the workforce at
the start of a recession. She worries that as others consider tightening their
wallets, she’ll be entering a field dependent on charitable giving.
“Women don’t stop being abused just because
there’s a recession,” Williford, 23, said. “If there’s a recession, there’s no
giving, and nonprofits are not going to have money to do their work, let alone
to hire new people.”
When she thinks about that word — “recession”
— Williford says she thinks back to the Great Recession. She was in middle
school then and watched as her mother, a teacher, lost her job because of
budget cuts at her school, even though she ended up landing on her feet.
Williford considered taking out loans this
year to “have some more wiggle room.” Instead she’s thinking about where to
start saving.
“So many of my friends are graduating with
debt and are going to be trying to find a job,” Williford said. “It’s just one
thing on top of the other.”
Joshua Leve, founder and chief executive of
the Association of Fitness Studios, said he’s not worried but staying alert to
how the economy and the trade war could affect fitness studios and others, such
as equipment manufacturers, who may be affected by tariffs.
“Right now everybody is just kind of keeping
their ears perked to keep an understanding of how is this going to impact me?”
Leve said.
How Americans feel about the economy is
driven partly by their feelings about Trump. Republicans routinely say this is
the best economy since the 1990s boom, but Democrats do not, a split that could
become more pronounced as the trade war escalates.
Nearly 80 percent of Republicans rated the
economy as “excellent” or “good,” according to a Pew survey conducted in mid-July, before the latest stock market drop and
trade flare-up, but only 33 percent of Democrats said the same.
But even among the president’s party,
lower-income Americans do not view the situation as favorably.
“Only about half of Republicans with incomes
of less than $30,000 rate economic conditions positively,” Pew said.
Andrew Van Dam contributed to this report.
