Consumer spending drives the U.S. economy, and for now, it seems to be holding off a recession. However, it may be plateauing, or possibly leading into an eventual downturn. The consumer confidence index was in the 120s for September and Consumer spending was flat in August. It looks like the economy is holding its breath as we deal with both impeachment and looming Chinese tariffs.
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The U.S. Economy Is Driven by Consumer Spending
Consumer spending makes up close to 70% of the Gross Domestic Product (GDP). David Geller, a behavioral economist, said “a 5% reduction in spending comes out to 3.5% of the U.S. GDP. This amounts to more than the projected GDP for 2019”. Therefore, we need to keep an eye on consumer spending as we enter the holiday season.
The Money Anxiety Index
Mr. Geller developed this index as an early warning signal for consumer spending. The index includes several economic factors to estimate the worry and stress consumers feel. This index has been around in 1959.
Its historic high was 135.5, which hit during the major recession in the 1980s, and its historical lows were in the 1960s. The long-term average over this 60-year range was 71. This index has been shown to be a good predictor. For example, it predicted the Great Recession nearly a year before it was officially announced in December of 2007.
So, Where Do We Stand?
The Index in September stood at 41.0, which is down since the bump-up in June, July, and August. Given, the figures are low and have ticked down, an imminent recession does not appear likely.
Summary – No Immediate Threat of Recession, but That Could Change
Based on the numbers, they do not indicate a recession is on the short-term horizon. However, given the impeachment inquiry and likely vote for articles of impeachment, in addition to the potential Chinese tariffs looming in December, things can change rapidly as we end 2019.
Given all the uncertainty, it would be wise to keep our ears to the ground and keep an eye on both these indices in the months to come. While a recession may not be imminent, it’s not a bad idea to have some contingency plans.