Both key capital goods and overall U.S. consumer spending gained serious momentum in November and look set to continue to year’s end. There is some concern among economists, though, that consumer spending is being too propped up via credit: household savings, which normally slump around Christmas time, have really been down recently.
The Department of Commerce noted that consumer spending experienced growth of half a percentage point last month. Considering the fact that consumer spending makes up two-thirds of gross domestic product in one way or another, that translates into a lot of additional business activity and sales.
Where is the uptick in spending taking place? The Department of Commerce says that three areas are seeing significant growth: utilities, motor vehicles, and recreational goods (e.g., tech gadgets). Much of this spending has been financed with credit, however; a reality that economists assure the public isn’t sustainable over the long haul without significant changes to wage growth in America.
Still, economists also note that the $1.5-trillion tax reform agenda that passed through the Senate this week could shore up more savings for consumers and spur consumer spending even more. Aggregate household savings among American families were below half a trillion dollars as of October – the lowest level since the recession hit back in August of 2018.
Treasury Secretary Steve Mnuchin and President Trump herald the new tax reform agenda as a potent tool for increasing consumer spending by putting more money in people’s pockets. The problem with that logic might be that the most serious tax cuts affect higher-income households, and these well-to-do households tend to spend less of their savings on the kind of consumption that powers GDP growth.
Simply put, income growth needs a serious shot in the arm for the average American household if these gains in consumption are to continue buoying the U.S. economy, according to economist Ian Sheperdson. A potential raise in interest rates proposed by Federal Reserve head Janet Yellen is also a worry for economists and financial experts.
The underlying economy is definitely humming along given the fact that interest rates have gone up three times throughout 2017 (and experts say will go up three more times in 2018). The implication is that even a stricter money supply can’t effectively blunt all of the growth, productivity, and consumer spending in the larger economy. That indicates a healthy overall economy set to grow further.