WEAK CONSUMER SPENDING AND TRADE WAR MADNESS FUEL THE CHANCES FOR A 2020 RECESSION
By Raul Elizalde
The most recent GDP numbers are out, and they reveal that US consumer
activity is weak. This is important, because consumer spending represents more
than 2/3 of total GDP.
Consumption weakness is most obvious in the declining spending on goods, where purchases are at their lowest percentage of GDP since the Great Recession. Including services, consumer spending added 0.9% to the recent 3.1% GDP growth number, a contribution that is well below its average over any period since records started in 1947.
Another indication of weakness is a slump in imports. In GDP arithmetic, lower imports add to GDP. For this reason, what at first glance seems to be a strong 3.1% GDP growth for the first quarter of 2019 owes 0.4% (the most since 2012) to a sharp decline in imports which is not only a consequence of the trade war with China but also of a retreating consumer. Robust government spending, rather than private consumption, added another 0.4%.
One rationale for the tariffs that the U.S. is imposing on China is to make Chinese imports more expensive for U.S. consumers, thus creating an incentive to increase domestic production. This is not showing up in the numbers. The contribution of Private Fixed Investment to GDP, at 0.78%, is below its average of 0.93% since 2Q09. Industrial production numbers, particularly manufacturing, have sharply decelerated in recent months. Whatever impact tariffs have, higher domestic production of goods does not seem to be one of them.
Higher tariffs on Chinese imports and new tariffs on Mexican goods are not bringing any visible benefit to the U.S. consumer, who has retreated steadily despite the employment boom. In that regard, and as noted previously, low unemployment not only does not prevent a recession but has been a consistent feature ahead of previous ones. The latest GDP number, far from demonstrating strength, shows a weakening outlook for the U.S. economy and growing chances for a recession in the next few quarters. A change of direction in trade policy is urgently needed to help avert one.