Strong Consumer Spending Could Spell Economic Trouble

Summary

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Podcast Summary: WSJ Your Money Briefing

Episode: Strong Consumer Spending Could Spell Economic Trouble
Date: December 26, 2017
Host: JR Whalen (The Wall Street Journal)
Guest: Justin LeHart (Wall Street Journal, “Heard on the Street” columnist)

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Episode Theme & Purpose

This episode examines the surprising strength of U.S. consumer spending during the 2017 holiday season and explores why high spending may signal future economic risks. The conversation delves into the relationship between consumer spending, personal saving rates, wage growth, business investment, and the broader implications for the U.S. economy. It also considers what businesses and policymakers can do to create a more sustainable economic expansion.

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Key Discussion Points & Insights

1. Consumers Are Spending But Saving Less

• Americans increased their spending by 0.6% in November 2017, according to the Commerce Department.
• However, this spending is outpacing income growth.
• Saving rate dropped to 2.9%, the lowest since just before the Great Recession (2007).
• This reduced saving rate is concerning, as it implies consumers have less financial “cushion” for future spending or emergencies.

Justin LeHart: “People have been basically spending more or their spending has been growing faster than their income. So as a result the saving rate…has dropped to 2.9% last month. That's the lowest since right before the recession started in late 2007, as some might say.” [01:12]

2. Consumers Can Only Fuel So Much Growth

• Consumer spending drives about two-thirds of the U.S. economy, but there’s a natural limit:
  • It can only grow as fast as incomes grow.
  • If savings are low, there’s less capacity for additional spending booms, even if confidence is high.

Justin LeHart: “What it does is it means…there may not be a lot of extra oomph that the economy can get as opposed to if the saving rate was really high, then if people got excited, then they could spend more. Now if they get really excited, it's hard to spend more.” [01:38]

3. The Role of Wages and Business Investment

• For sustainable growth, wage increases and business investments are critical.
• Despite low unemployment rates, significant wage gains have been lacking.
• The possibility of wages rising more as the unemployment rate (already near historic lows) continues to fall.
• Recent corporate announcements of bonuses or starting wage hikes (in response to the 2017 tax bill) might signal a shift, but so far, most are one-time gestures, not real wage growth.

Justin LeHart: “One thing that we expect is that wages are going to pick up more…because the unemployment rate is so low. The problem is that…the unemployment rate has been so low for a while now, and so far, we haven't really seen it.” [02:43]

• Business investment is another missing ingredient:
  • Increased investment in productivity and technology can boost economic growth and eventually wages.
  • There's been a notable lack of business investment since before the 2008 recession.

Justin LeHart: “There's been a dearth of investment for a long time…it's one of the reasons that the economy seems to be growing…slower is we're just not as productive as an economy as we have been in the past.” [04:06]

4. Federal Reserve’s (The Fed) Role and Outlook

• Fed is on the lookout for wage growth (and inflation) as triggers for policy responses.
• They may tolerate rising wages for a time, waiting to see if inflation follows before acting aggressively (e.g., by raising interest rates).

Justin LeHart: “They're probably going to be just happy to see wages go up and they may even take a little time and wait to see it actually filter into inflation.” [05:18]

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Notable Quotes & Moments

• On consumer ability to keep spending:
  “You can only spend as much money ultimately as you make. So what has to happen is people either have to make more…or they're going to have to spend at a slower rate.”
  — Justin LeHart [02:17]

• On the importance of business-led growth:
  “Investment is one thing that does add, add to growth in the economy. So when people are investing, that helps a lot.”
  — Justin LeHart [04:06]

• On Fed policy and wage growth:
  “They're probably going to be just happy to see wages go up and they may even take a little time and wait to see it actually filter into inflation.”
  — Justin LeHart [05:18]

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Important Segments & Timestamps

• 00:41 – Holiday spending surge and saving rate concern introduced.
• 01:12 – Discussion of falling saving rate; historic context.
• 02:08 – Explanation of limits on consumer-driven growth.
• 02:43 – Why businesses need to step up with wage increases.
• 03:21 – Discussion of tax bill’s early effects and potential for wage increases.
• 04:06 – Emphasis on business investment to support growth.
• 04:56 – Missing puzzle pieces: investment and wage growth.
• 05:18 – The Fed’s wait-and-see approach to wage increases and inflation.

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Summary & Takeaway

While strong consumer spending helped power the 2017 holiday season, it inadvertently highlighted a vulnerability: Americans are spending more than they’re earning, causing the saving rate to fall to worrying lows, reminiscent of pre-recession levels. For continued and sustainable economic growth, wage increases and business investments are essential. The Federal Reserve is attuned to these developments and will look for wage-driven inflation before major policy moves. The bottom line: the torch must now be passed to businesses and employers to fuel the next phase of economic expansion, rather than relying solely on consumer exuberance.

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Transcript

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[JR Whalen]

Welcome to youo Money Matters. I'm JR Whalen in New York. Americans haven't been bashful about spending during this holiday season. The Commerce Department reports spending in November rose 0.6% from a month earlier. But their buying mood might set up trouble on the horizon for the US Economy. Wall Street Journal Hurt on the street columnist Justin LeHart joins us to explain. So, Justin, consumers having the confidence to spend is certainly better than if they were pessimistic. But there's concern over how their spending stacks up against their personal saving rates.

[Justin LeHart]

Yeah. So what's been happening is people have been basically spending more or their spending has been growing faster than their income. So as a result, the saving rate, the amount of their income that they save, has been dropping, and it's dropped to 2.9% last month. That's the lowest since right before the recession started in late 2007, as some might say.

[JR Whalen]

That's a lot of consumer exuberance.

[Small Business Owner 2]

Yeah.

[Justin LeHart]

I don't know if people feel exuberant, but they definitely are spending. You can only spend so much. You can only dip into the saving rate so much. What it does is it means that there's just not a lot of there may not be a lot of extra oomph that the economy can get as opposed to if the saving rate was really high, then if people got excited, then they could spend more. Now if they get really excited, it's hard to spend more.

[JR Whalen]

Consumer spending accounts for about two thirds of the US Economy. But like you're saying, with this mathematical formula, the consumer can only really do so much.

[Justin LeHart]

Yeah. I mean, ultimately, consumer spending can only grow as fast as the economy grows. You can only spend as much money ultimately as you make. So what has to happen is people either have to make more that can make spending go up, or they're going to have to spend at a slower rate.

[JR Whalen]

And that's one thing. You point out in your column in the Wall Street Journal that it'll be up to businesses to step in and fuel the economy. One way to do that is through compensation.

[Justin LeHart]

Right. So one thing that we expect is that wages are going to pick up more than they have been picking up, and that's because the unemployment rate is so low. The problem is that the unemployment rate has been so low for a while now, and so far, we haven't really seen it. We hear a lot of people complaining about it, talking about how they can't find workers, but we don't really see a lot of wage increases in the data. So maybe with the unemployment rate looking like it's going to go below 4% next year, maybe we're going to start seeing those income gains and that could feed into higher spending.

[JR Whalen]

Well, we've seen with the signing of the tax bill by President Trump that some companies have stepped up and said we're going to, in some cases, raise the minimum wage or shell out a bonus. I mean, doing a bonus is not raising wages. But maybe it's down the track in the right direction.

[Justin LeHart]

It could be. It could be. It's hard to know. Right. Because a lot of this is sort of promotional. And, you know, we have to see. We're going to have to see the actual data to see that people are reacting the way they say that they're reacting.

[JR Whalen]

All right. And there's more that businesses can do. We'll get to that in just a moment. We're speaking with Hurt on the street columnist Justin lehart, and you're listening to your Money Matters from the Wall Street Journal. Welcome back, everybody. So, Justin, you feel also that businesses stepping up investment would be a good shot in the arm for the economy.

[Justin LeHart]

Yeah. Investment is one thing that does add, add to growth in the economy. So when people are investing, that helps a lot. You have to remember also, ultimately, when you invest in labor saving devices, that helps you save on labor and grow more. But the initial thing that happens when you invest that money in the new thing is whoever makes the new thing is going to be getting paid more, is going to get hired. So that would be good. And I think definitely it would just be good in general for companies to invest more. There's been a dearth of investment for a long time for really even before the recession started. And it's one of the reasons that the economy seems to be growing, the economy is growing slower is we're just not as productive as an economy as we have been in the past.

[JR Whalen]

It really has been investments, investment by business. And wages have been the missing pieces to this jigsaw puzzle. And you see The Federal Reserve having been on the sideline waiting for wages to come up and they're waiting for inflation also, but they've been waiting for wages. And you would imagine that with the economy the way it is and unemployment like you said, that they would start to come up.

[Justin LeHart]

Yeah, you would. And it's a good question about, well, what's the Fed going to do if you think about it? Well, on the one hand, wages is something they worry about because when wages go up, there's inflation. But I think they're probably going to be just happy to see wages go up and they may even take a little time and wait to see it actually filter into inflation. I mean, they're going to raise rates if they see wages go up, but they may not get really, really worried until they see that show up in the inflation number.

[JR Whalen]

Well, the Fed would like to see wages go up. So would your neighbor down the street who goes to work every day and make a lot of people happy. That's the Wall Street Journal's Justin lehart joining us. Justin, thanks for your time.

[Justin LeHart]

Thank you.

[JR Whalen]

And thanks for listening to your Money Matters. I'm JR Whelan in New York for the Wall Street Journal.

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[Small Business Owner 1]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Small Business Owner 2]

Infliction is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner 1]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Small Business Owner 2]

they need while increasing megastore profits. They deserve it, don't they?

[Wall Street Journal Announcer]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.