The Many Lives of the U.S. Consumer

Chief Economist Eugenio J. Alemán discusses current economic conditions.

To argue that the U.S. consumer has remained resilient has become a cliché and at the same time an understatement. After a very strong increase in real incomes during the pandemic, real income growth started to slow considerably. The first slowdown occurred when the federal government ended its income transfer campaign at the end of the pandemic recession. The second one started in 2021 as inflation started to bite hard and the purchasing power of income declined accordingly. However, lately, while the growth in real consumption expenditures has normalized and stabilized at around 2.0% per year at a 12-month- moving average rate, real disposable personal incomes have started to move higher as inflation’s bite has subsided and employment growth has remained relatively strong. Real disposable personal incomes are growing at about a 3.2% rate on a 12-month moving average versus a rate of slightly below 2.0% for real personal consumption expenditures.

The strength of the U.S. economy was reflected once again during Wednesday’s release of the ISM Services PMI, which showed a relatively strong service economy, as the Index remained in expansion territory for an eleventh consecutive month and showed an improvement compared to October of this year. The slightly negative reading from the ISM Services PMI was on the side of inventories, which could indicate trouble ahead if the holiday season is not as strong as firms in the service sector expect.

Real Disposable Personal Income

November employment and the Fed: The devil is the details

November’s employment numbers were very positive for the U.S. economy and a mixed bag for the Federal Reserve (Fed) as it remains clear that today’s high interest rates have done little to convince U.S. firms to slow down the hiring process. Having said this, the devil is in the details: only three sectors of the economy added workers at a fast pace, the health care and social assistance sector, the leisure and hospitality sector, and the government sector.

Two of those sectors were in the service side of the economy while the other one was local and state governments. The increase in local and state government workers continues to reflect the fact that these governments were probably ‘priced-out’ of hiring during the strong recovery from the pandemic and are now taking advantage of an increased supply of workers while at the same time they are probably still awash in cash from the transfers received during the pandemic. Meanwhile, the health care and social assistance sector is a sector that typically does well during good as well as bad economic times while the leisure and hospitality sector continues to recover from the pandemic. However, the overall performance of employment was not as strong as these three sectors indicate, so, for the U.S. economy, the news is positive. For the Fed, the mixed report supports its stance regarding monetary policy: staying put next week after the Federal Open Market Committee (FOMC) meeting.

This means that the Summary of Economic Projections, or SEP, as well as the dot plot will have added importance for markets. However, don’t expect it to give much certainty going forward.