US GDP Down – Where Is The Consumer?
WASHINGTON – Was the low US 0.7 % GDP growth figure for the last quarter of 2015 just a glitch? (For the entire year the US economy grew at a semi-respectable 2.4%). Or is it a sign that the long, albeit anemic, recovery is running out of steam? May be the latter.
The only positive element that allowed GDP to grow a little at the end of 2015 is some consumer spending growth, in particular a spectacular increase in car purchases, a trend that went on throughout the entire year. Well, this should be a good sign. Cars are big ticket items. Millions of new cars sold in 2015 means that millions of Americans have enough money to spend.
Yes, except that it is not so. Cars flew out of dealerships because easy credit was extended to practically anybody walking in. Easy financing terms, plus very cheap gasoline provided a huge incentive.
Buying on credit
The problem is that if modest GDP growth is mostly the result of millions of people buying stuff with money they do not have, pretty soon this game will be over. This time, as every other time, there is a limit as to how much people can borrow. And when that limit is reached, consumption will stagnate or collapse.
So, here is the thing. Decent 2.4% GDP growth in 2015, (even if we average it by including the 4th quarter sharp decline), largely driven to consumer spending is not a real indicator of economic health. And this is for the simple reason that this spending is not sustainable. You cannot have an almost stagnating economy, with stagnating wages, and higher consumer spending, all at the same time.
Union Pacific management is worried
At a different level, we hear the same concern from top management of Union Pacific, the biggest freight railroad in America.
They are pessimistic about the future of the US economy, because they see a lot less volume traveling on their railroad cars. All key sectors are down: coal, steel, agricultural products, industrial goods, and consumer products.
Where is the consumer?
“Where is the consumer?”, they ask. And this is because they know very well that sustained consumer demand is ultimately what generates increased volumes of goods transported on their freight trains.
Well, if the people at Union Pacific are worried about flagging consumer demand, we should be worried too. Freight volumes are a very good proxy for the entire US economy.
So, “Where is the consumer?” The consumer, despite lower gasoline prices that theoretically act as a nice tax cut, is staying home. And he is staying home because he has already got too much debt.
Yes, there are many more jobs. Unemployment is down to 5%, the historic norm. And this is good.
Low paying jobs
However, most of these new jobs are low paying. And this means that many newly hired people, after they have used most of their low wages to pay for rent, utilities and other basic necessities, have very little discretionary income.
A family of four surviving on $ 25,000 or $ 30,000 a year does not have the extra money to splurge on flat screen TVs and smart phones.
Hence reduced volumes on Union Pacific, and a very disappointing 0.7% fourth quarter GDP growth number. Can this change in 2016? Yes, it can, provided an income boost.
And where will that come from? It would have to come from significant growth in spending by people employed in new competitive sectors. People who earn good money.
Bar tenders, store clerks, janitors, gardeners and nursing assistants simply do not have the spending power to create significant new demand. And without new demand, (you have to look at weak domestic demand in context with declining foreign demand due to a global slow-down), it is hard to see what would generate higher GDP numbers next quarter.
Reduced volumes on freight trains
I have the feeling that Union Pacific, in response to declining freight volumes, pretty soon may have to idle at least some of its locomotives and railroad cars, this way contributing to a national economic retreat.