Consumers remain key to economic recovery
Consumer spending is by far and away the main driver of the U.S. economy – accounting for more than two-thirds of all economic growth. But that spending on food, clothing, cars, entertainment and other household goods and services requires an optimism by Americans on their financial and job security.
It was consumer spending that drove America’s robust economic growth in 2017-2019, despite our near two-year trade disputes with China, Canada, Mexico, the European Union and a host of other countries. While other economic components such as manufacturing and business spending had their ups-and-downs, it was consumer spending that held firm to drive our economy forward. Even in January and February, American consumers were highly optimistic about their 2020 financial and employment prospects.
The Consumer Confidence Index is a key metric of optimism on the state of the U.S. economy. It is released each month by The Conference Board, an international think-tank that analyzes economic conditions on business. The index has a benchmark of 100. Any level above 100 indicates an optimism on jobs and income by consumers – who ultimately will spend money and stimulate economic growth.
The Consumer Confidence Index for March was reported at 120. This was sizably lower than January and February’s index level of 130.4 and 132.6, respectively. For perspective, the 20-year high for the index was reported at 137.9 back in October 2018. The record low is 25, set in February 2009 at the height of America’s subprime mortgage crisis.
Given our current COVID-19 environment, March’s index level of 120 seems surprisingly high. Remember, it was in March that government mandates and social-distancing norms shut down or impaired entire industries within our economy. However, as these mandates and social norms are expected to continue at least through April, the financial markets are beginning to question the sustainability of this level of consumer optimism.
The U.S. is a highly durable and resilient entity that can withstand a tremendous amount of punishment. But the global fallout from the COVID-19 virus will have a brutal short-term impact on the U.S. economy and labor market. For the April-June second quarter, the U.S. economy will likely experience the largest quarterly economic decline in American history. The latest employment data from the U.S. Department of Labor is already showing the stark aftermath of business closures and layoffs. As our economy and labor market weakens, so should Americans’ confidence to spend their money.
The financial markets do expect a sharp V-shaped economic recovery in the second half of this year. However, the speed of that recovery is ultimately dependent on how long the COVID-19 virus continues to escalate. The longer it lasts, the greater the impact to the structural fabric of America’s economy and labor force, and ultimately, the greater the toll on Americans’ confidence.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
