Consumers Drive Economy While Business Dithers

The US economy expanded at an annualized rate of 1.9 per cent in Q3/19, fueled in large part by consumers. The Q3 result represents the third sub-2 per cent quarter over the last 15 quarters.  The overall trend so far this year shows a steady deceleration from Q1 growth of 3.1 per cent. Personal expenditures, comprised of household spending on goods and services, expanded at a 1.9 per cent annualized rate over the three months ending in September, coming in just below its quarterly median dating back to 1969. The household sector remains solid, reflecting a strong job market. According to the Bureau of Labor Statistics, as of August there were more job openings, 7.1 million, than there were unemployed, working-age Americans, 5.5 million. Wages expanded 2.9 per cent year-over-year through September, which was comfortably above the Fed’s preferred inflation rate of 1.8 per cent. And gasoline remains cheap: Americans can drive nearly 300 miles on an hour’s work, which is in the 95th percentile of its historical range since 1980.

Though consumers were resilient and strong, business activity was weak in Q3 as global uncertainties and slowing growth weighed on corporate decisionmakers. Nonresidential investment (business spending on plant, property and equipment) sagged at an annualized rate of 0.4 per cent; structures were off 0.5 per cent, which represented the steepest decline in structures investing since 2015. The unwillingness of business leaders to spend reflects a deterioration in CEO sentiment, which peaked in July 2018. Cresset research found that hiring growth tends to track CEO sentiment with a 6-month lag. Manufacturing hiring, for example, has been tepid in recent months with net job losses in March and September.

Without a clearer landscape in terms of both Brexit and China trade, we expect CEO sentiment to deteriorate further, dragging down business spending and hiring along with it. The October jobs report, to be released on Friday, will provide further insight into the state of mind of corporate decisionmakers.