In the third quarter GDP rose at a pace of 3.5 percent — a rebound in economic growth and the best result seen in two years. Consumer spending alone contributed a vital 2 percentage points to growth. It is clear that the U.S. consumer is in the driver’s seat and the U.S. economy will continue its dependency on the pace of household spending. Consumers have not been haphazard or unselective with their spending; throughout 2016 and especially during the holiday season, shoppers continue to be price-conscious, seeking value and taking advantage of promotions.
Holiday season retail sales will be a major ingredient in the final calculation of fourth-quarter GDP. November personal income and spending data indicates, however, that the economy may be losing some momentum. Personal income was essentially flat including a downward revision to October’s reading, though registering a growth of 3.5 percent on year-over-year basis. Meanwhile, aggregate wage growth, which is the leading component of personal income, posted a solid 4.2 percent reading. This measure supports the idea that households have the wherewithal to spend. Slower job growth this year compared to last may be a contributing factor to the perceived income slowdown. Adding jobs to the economy results in additional income and new spending, especially retail sales. Having said that, the moderation in November still follows two very strong months of gains.
While fourth-quarter GDP growth is expected to be moderate, its fundamentals and third-quarter momentum remain intact. Business and consumer sentiment remain elevated since the election. Stock prices are resilient and home prices are rising. Meanwhile, it is heartening to see that with recent increases in income and net worth, spending has been sustained without any reductions in savings. The savings rate has been sturdy at over 5 percent during the economic recovery and has averaged 5.6 percent for the last two years. Moving forward with wage growth picking up as the job market tightens, households should have the financial power to maintain their spending despite the potential for slowed job growth.
NRF expects consumers to remain a key support to economic growth in the year ahead. With inflation and interest rates edging higher, the pace of consumer spending growth is likely to remain stable, even with continued job and income growth. Never count the consumer out. As long as consumers continue to spend, the economy will continue to grow.
Download this month’s report, which includes the following charts and highlights:
- Consumer sentiment
- Holiday Sales
- Payroll
- GDP and unemployment
- Income and consumption
- Job openings
- Housing market
- Consumer price index