A number of factors are contributing to the supreme level of confidence among US consumers. One of the most important is the labor market, where unemployment has fallen to 3.7% – the lowest level since 1969. Moreover, the latest labor market figures emphasize the US economy’s role as a job creation machine. Another 250,000 jobs were added in October, exceeding expectations. It is now eight years since payrolls fell during a calendar month.
Healthy household finances
In the last couple of months job creation has also been accompanied by faster wage growth. After fluctuating around 2.5% for a few years, wages grew by more than 3% in September for the first time in over ten years. At least as important is the fact that, with inflation at 2.3%, real wages are now increasing as well. US consumers are thus seeing a real increase in their purchasing power.
It is precisely this combination of more employed Americans and higher wages that is creating a strong foundation for the US economy. If the current trend continues, US consumers – who represent around 70% of US GDP – will continue to spend, also because this time household finances look very healthy too.
The graph above shows US household debt as a percentage of GDP. It reveals that while debt levels started rising much faster than the long-term trend at the beginning of the millennium (which ultimately led to the start of the financial crisis), in the past ten years there has been a rapid decline. You might question whether such a long-term rising trend in debt-to-GDP is desirable, but we should also take into account the fact that household wealth has soared as well. This is largely due to strong growth in house prices and the stock markets in recent years. Even so, a significant downward trend in household debt levels is a positive development in any case.
But are there no risks? Of course there are. A rapid rise in interest rates could put a damper on the pace of US consumer spending. Rates on 30-year mortgages in the US are now around 5%, and mortgage payments are increasing. However, current mortgage rates – like many other interest rates – are still low from a historical perspective. If the housing market were to collapse, this could put pressure on consumer spending. But the foundations of the US housing market are still strong. No: the risks lie elsewhere. Companies, for example, have accumulated much more debt than consumers and an escalation of the trade war between China and the US could dampen sentiment. However, the confident consumer will remain a key driver of US growth for the time being.