Inflation and retail sales data released last week help clarify the conundrum of the United States’ economic performance. Overall, US economic growth is crawling along at just above 2% for the third quarter, according to the Atlanta Federal Reserve’s GDP Now tracking model. Only a month ago, the Atlanta model foresaw 4% growth. But the aggregate numbers obscure a sharp divergence between the economic fortunes of the bottom half of American households by income and more affluent Americans.
US retail sales fell by 0.2% in August, and July’s gain was revised down to a modest 0.3% from an initial estimate of 0.6%. Notably, discretionary spending by lower-income households appears most affected. Fast food is an affordable luxury for lower-income households, and the year-on-year growth rate of food service spending has dropped from 10% in 2014 to just 2% in August.
The inflation data also show weakening demand. The headline inflation number jumped because Hurricane Harvey caused a 6% jump in gasoline prices. The Consumer Price Index rose by 1.9% year-on-year, close to the Federal Reserve’s stated target of 2%. But net of food, energy and shelter, CPI rose by just 0.5% year-on-year, the lowest reading since the financial crisis.
The 0.5% jump in shelter prices during August accounted for more than the entire monthly increase in the so-called core CPI, that is, net of food and energy. Shelter, though, distorts the picture. With 30-year mortgage rates below 4%, more affluent US households continue to buy homes. Home prices are increasing at a 6% annual rate (from a low base after the 2008 crash), but that is an expression of asset price inflation, not consumer demand for goods and services.
America remains stuck in a pattern of low wage growth, with year-on-year change in average hourly earnings still below pre-recession levels. The bulk of employment growth has occurred in low-wage industries such as food and hospitality or health care, and the burgers-and-bedpan jobs pay less than the average. That keeps aggregate wage growth low.
The balance sheet of the bottom tier of US households is starting to fray. Rising auto loan delinquencies are a failsafe sign of trouble. During the mid-2000s, the percentage of delinquent auto loans hovered around the 12% mark, but rose above 20% after the financial crisis. The delinquency rate fell back to around 10% in 2012, but has since risen to above 20%.
Forced sales of autos due to loan defaults are responsible for deflation in the price of used cars and trucks, which has fallen by 11% from the 2014 peak.
Without a tax cut, the US economy will struggle to maintain a 2% growth rate during the next year. That suggests a digital outcome for US growth: if the Trump Administration fails to pass a tax cut during 2017, we can expect the US economy to crawl just above recession levels in 2018.