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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Updated: The Myth of Consumer-Driven Growth


Riding roughshod over inconvenient facts and figures in its determination to declare victory, the Fed has finally raised rates, seven years to the day after the fed funds rate hit the zero lower bound. Following this rate hike, multiple additional rate hikes next year are widely expected.

During Q&A Fed Chairman Janet Yellen spoke about “upside risks to the economy,” mentioning the “much healthier” consumer. Clearly, the optimism about economic growth holding up, such as it is, or even accelerating, is predicated not on manufacturing or exports, but on consumer spending, which makes up more than two-thirds of U.S. GDP.

But in reality, consumer spending has been slowing steadily. As the updated chart shows, year-over-year (yoy) real personal consumption expenditures (PCE) growth is in a cyclical downturn and has now dropped further to an 18-month low (thick blue line). The sources of this growing weakness are telling.



Specifically, yoy real PCE growth for goods (teal line) — though bolstered by deflation in goods prices — remains well below its January high. Meanwhile, growth in services spending is in a decisive downturn. In particular, after a six-percentage-point two-year surge that ended in the first quarter of this year, yoy real PCE growth for health care services has turned down, declining to a 13-month low (thin dark blue line). And yoy growth in services excluding health care (light blue line) — which accounts for almost half of total consumer spending — has tumbled to a 25-month low. Thus, the premise of a consumer-driven pickup in U.S. economic growth is demonstrably false.

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