US consumers are holding up global economy, but for how long?

But as a number of signs point to a possible downturn in the US, economists are growing more sceptical that consumers will continue to open up their wallets as freely. A failure to do so could hasten the arrival of the first US recession in a decade.

Low unemployment, rising wages and easy credit have given consumers the confidence and ability to spend in recent months. That has proved crucial as spending by US businesses has declined, US manufacturing has fallen, and the economies of many other large countries have begun to shrink. The strength of the consumer has convinced many business leaders that the US economy won’t go into recession soon.

Yet a number of developments could shift this view.

The US stock market, which saw its largest one-day decline of the year on Wednesday, has proved highly volatile as US President Donald Trump’s trade war with China has escalated. Bond markets, which have a strong track record of predicting recessions, are flashing warning signs. And the trade war itself, which for the most part hasn’t hit consumers directly, will begin to do so more forcefully in the fall as tariffs rise on consumer staples, including some food and clothing products.

Reliable warning sign

One of the most reliable warning signs arrived Friday, when the University of Michigan’s consumer confidence index fell to a seven-month low, and the index measuring Americans’ outlook for the future dropped even further.

It was “the first indication that the US consumer might not save the world economy after all,” Paul Ashworth, chief US economist for Capital Economics, wrote.

Other challenges are also on the horizon. Historically, consumers have been spooked by falling stocks and a decline in hiring. The job market has been red hot, but there are signs of a hiring slowdown. And growth in paycheques is slowing as well.

How Americans feel about the economy is driven partly by their feelings about Trump. Republicans routinely say this is the best economy since the 1990s boom, but Democrats do not. Nearly 80 per cent of Republicans rated the economy as “excellent” or “good,” according to a Pew survey conducted in mid-July, but only 33 per cent of Democrats said the same. But even among the president’s party, lower-income Americans do not view the situation as favourably.

“Only about half of Republicans with incomes of less than $30,000 rate economic conditions positively,” Pew said.