Through the summer, retail sales held strong, even as financial markets bounced around and tariff threats escalated. Meanwhile, the Conference Board’s Consumer Confidence Index, which measures people’s optimism about the labor market and business conditions, has remained near post-recession highs.
Economist James Bohnaker at IHS Markit said that consumers are heading into fall with a strong wind at their backs, driven by “the strong job market, and income growth pretty solidly up.”
Bohnaker said that with inflation relatively low, consumers’ purchasing power is rising. Another effect of increasing wages: household net worth and the savings rate are gaining ground.
There is a moderate risk to continued strength in consumer spending and sentiment from the ongoing trade war with China, Bohnaker said. “Upcoming tariffs are going to probably raise prices for a number of consumer goods.”
There are other risks showing up on consumers’ balance sheets. According to the Federal Reserve Bank’s most recent quarterly report on Household Debt and Credit, household debt (including mortgage, auto, student, credit card and other loans) is at a six-year high. Loan delinquencies continue to rise, especially on student and auto loans.
Consumer psychologist Kit Yarrow, author of the book “Decoding the New Consumer Mind,” pointed out that for many years after the Great Recession, as the economy slowly recovered, consumers remained frugal and avoided debt. “Now we see credit card debt is going up again, and consumers are sort-of forgetting,” she said.
Consumers’ increased willingness to borrow will likely help drive holiday sales higher this year. Bohnaker predicts an increase of 5.2% over 2018. However, he points out that the 2018 holiday shopping season ended relatively weakly, with consumer spending dragged down by a severe stock market downturn and threats of a government shutdown.
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