When the U.S. consumer is doing well, so is the economy. The driver of U.S. economic growth is personal household consumption, which accounts for 68% of U.S. GDP. This share of the economy is over 10 percentage points higher than other countries. The good news is that after years of solid job creation and rising house prices, American households are healthy, and it is showing.
The household sector has been the bright spot of the American economy for the past two years, with personal consumption growing in real terms by an average rate of 3% between 2014 and 2016. Even when business investment was weak and exports faced substantial headwinds, household spending grew steadily as confidence is now at a 13-year high.
Eight years into the expansion, more than 16.4 million jobs have been created, more than offsetting the 8.7 million jobs lost during the recession, and the unemployment rate, at 4.3%, is now lower than it was before the recession began (see Figure 1). Real disposable personal income has grown 16%, and household net worth, thanks in large part to the equity bull market and recovering home prices, is over $27 trillion higher than its prior peak reached in 2007 (see Figure 2).
In addition to improvements in consumer assets, the liability side of the ledger has considerably declined. Household debt as a percentage of both GDP and disposable income had fallen by about 25% from their highs in early 2008 to levels last seen in 2001 (see Figure 3). Combined with historically low interest rates, deleveraging has made debt servicing a lot easier for households.
Importantly, unlike prior cycles in which consumption was boosted significantly by the wealth effect, consumer spending this cycle is being driven primarily by real income growth. Lessons learned from the financial crisis have resulted in a more responsible consumer. Today's consumer is spending within their means and maintaining a healthy saving rate.
Of course, no expansion lasts forever, and there are indications showing later-stage signs. The peak in corporate profit margins, near record-low unemployment, and rising labor costs are in the later stages. Pent-up demand for consumer goods like cars is becoming less of a driver of spending, while slowly rising interest rates over the next year could begin to reduce consumer big-ticket purchases. As a result, job creation and consumer spending are likely to slow in 2019.
Nevertheless, with wages now beginning to rise, as well as potential tax cuts in the pipeline, households should have plenty of scope to maintain a healthy level of spending for the rest of 2017 and for 2018. Time and again since the Great Recession, we have heard talk about demise of the U.S. consumer. Yet, eight years later, American households are generally employed, wealthier, and increasingly confident. What's more, these measures have developed from sources of potential strength to drivers of growth. If consumers continue to flex their strength, the expansion, while aging, should still have at least another year of life left in it.
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