Con­sumer spend­ing could be next US domino to fall

The Morning Call - - BUSINESS CYCLE - By Damian J. Troise

NEW YORK — Con­sumers have sup­ported the econ­omy dur­ing its record-set­ting ex­pan­sion, but a shrink­ing man­u­fac­tur­ing sec­tor, crush­ing tar­iffs and other dan­gers may bring the good times to an end.

Fresh warn­ing bells rang on Wall Street ear­lier this month af­ter fac­tory out­put shrank for the first time in three years. That threat­ens the econ­omy’s decade­long ex­pan­sion, as it could lead to cuts in jobs and wages, un­der­min­ing the U.S.’s con­sumer-led growth.

“With­out any sort of cat­a­lyst to help turn the sen­ti­ment around we an­tic­i­pate that con­tin­ued weak­ness in the man­u­fac­tur­ing sec­tor is likely to bleed over into the con­sumer sec­tor, which then can drag down the econ­omy fur­ther,” said Peter Don­isanu, in­vest­ment strat­egy an­a­lyst at Wells Fargo In­vest­ment In­sti­tute.

Con­sumer spend­ing mo­men­tum typ­i­cally fol­lows the health of the man­u­fac­tur­ing sec­tor.

Au­gust’s weak man­u­fac­tur­ing data is just the lat­est sig­nal of a slow­ing econ­omy. U.S. man­u­fac­tur­ers also cut jobs last month, and busi­ness spend­ing is fall­ing.

“Busi­nesses are hold­ing back on spend­ing be­cause they’re wor­ried about not know­ing what the rules of the game are, re­lated to trade, said Ja­son Pride, chief in­vest­ment of­fi­cer for pri­vate wealth at Glen­mede.

Mean­while the La­bor De­part­ment said man­u­fac­tur­ing pro­duc­tiv­ity suf­fered its worst per­for­mance in the sec­ond quar­ter since mid-2017. Taken to­gether the data points to lag­ging de­mand that could even­tu­ally drag down con­sumer spend­ing.

Signs of con­sumers’ anx­i­ety have al­ready be­gun to ap­pear. Re­tail sales, ex­clud­ing auto pur­chases, were flat in Au­gust, ac­cord­ing to the Com­merce De­part­ment. Sales at restau­rants and bars, an indicator of Amer­i­cans’ dis­cre­tionary spend­ing, fell 1.2% last month, the steep­est drop in nearly a year. Sales at gro­cery stores, cloth­ing re­tail­ers and fur­ni­ture stores also fell. Gen­eral mer­chan­dis­ers, which in­clude chain re­tail­ers such as Wal­mart and Tar­get, re­ported a 0.3% drop.

Mean­while, con­sumer sen­ti­ment fell last month by the most in seven years, ac­cord­ing to the Univer­sity of Michi­gan’s con­sumer sen­ti­ment in­dex.

In­vestors should keep a close eye on how the ser­vice sec­tor, which makes up the bulk of the U.S. econ­omy, re­acts to the hurt­ing man­u­fac­tur­ing sec­tor.

“We’ve seen cy­cles where man­u­fac­tur­ing pulled back and ser­vices fol­lowed. When that oc­curred, we ended up in a more dif­fi­cult eco­nomic en­vi­ron­ment,” Pride said.

For now the ser­vices sec­tor is hold­ing up, even ex­pand­ing at a stronger pace in Au­gust af­ter two months of cool­ing.

For busi­nesses and in­vestors, much de­pends on how the trade feud be­tween the U.S. and China plays out. The coun­tries plan to meet in Oc­to­ber to con­tinue ne­go­ti­a­tions.

If the Trump ad­min­is­tra­tion’s tar­iffs on Chi­nese im­ports lead, as ex­pected, to higher prices on ev­ery­thing from toys to cloth­ing and shoes, it could un­der­mine con­sumer con­fi­dence even fur­ther, weak­en­ing the econ­omy’s last re­main­ing sup­port. Tar­iffs on many pop­u­lar con­sumer items are sched­uled to kick in on Dec. 15.

RICHARD DREW/AP

A con­trac­tion in the man­u­fac­tur­ing sec­tor could lead to a de­cline in con­sumer spend­ing.

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