August 01, 2016
Economics Group
Special Commentary
Eugenio J. Alemán, Senior Economist
eugenio.j.aleman@wellsfargo.com ● (704) 410-3273
Michael A. Brown, Economist
michael.a.brown@wellsfargo.com ● (704) 410-3278
Midyear Consumer Spending Outlook:
Consumer Spending Remains the Key Support to Growth
Executive Summary
The first half of this year has been marked by softer than expected GDP growth with Q1 GDP
growth held back, in part, by weaker real consumer spending. GDP in Q2 posted an
underwhelming 1.2 percent annualized growth rate despite second-quarter real consumer
spending posting a sharp rise. In this year’s midyear consumer spending outlook, we take a look
back at the first half of the year and set out our expectations for the remainder of this year.
An expected sizable bounce back in real consumer spending in the second quarter should, in our
view, setup the third and fourth quarters with solid, but more modest gains in real consumer
spending. The backdrop for U.S. consumer demand remains positive for the second half of the
year with monthly job gains around 175,000 per month and real disposable income growth
averaging around 2.7 percent for the second half of the year. In addition, consumer credit
fundamentals continue to point toward a solid pace of consumer spending. Our expectation is for
real consumer spending to expand at a 2.7 percent pace in the third quarter and around
2.0 percent in the fourth quarter of this year. Even with our baseline views of modest consumer
spending over the next couple of quarters, there remain risks to the outlook, particularly in the
form of the potential erosion of consumer confidence, should equity market volatility pick up later
this year.
Why Was PCE Growth Softer in Q1?
The U.S. consumer has been the most consistent performer within the sectors that comprise gross
domestic product (GDP) since the recovery from the Great Recession. The consumption of goods
and services has contributed considerably to economic growth over the past several years after a
“mid-recovery” slowdown that mainly affected the consumption of services in 2011 and 2012
(Figure 1). That said, personal consumption expenditures (PCE) growth has been weaker in the
current recovery relative to prior recovery periods, underscoring the apparent structural
differences post-recession. The days of PCE contributing three to four percentage points to
quarterly GDP growth seem to be, for now, things of the past. Today’s contribution to GDP growth
from real consumer spending is closer to 1.0 percent to 2.5 percent in a good quarter.
Furthermore, consumer spending, which is the largest component of GDP, came in very weak in
the first quarter.
One possible explanation for the soft first-quarter real consumer spending reading may have to do
with what is termed residual seasonally.1 Residual seasonally would suggest that the seasonal
adjustment process for many of the underlying data series used to compute aggregate GDP
growth seem to have seasonal variation even after the Bureau of Economic Analysis (BEA) has
attempted to correct for the issue.2
For further reading on the effects of residual seasonality on GDP growth see Silvia, J.E. et. al. (2016).
Residual Seasonality in GDP: Mirage or Real? Wells Fargo Securities.
2 McCulla, S.H. and Smith, S. (2015). Preview of the 2015 Annual Revision of the National Income and
Product Accounts. Survey of Current Business. 95, No. 6.
1
This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
The backdrop
for U.S.
consumer
demand remains
positive for the
second half of
the year.
Midyear Consumer Spending Outlook
August 01, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Besides possible statistical noise in the GDP data, durable goods consumption fell into negative
territory, in part, due to very weak demand for automobiles in Q1. There were also other signs,
such as a higher rate of saving, that demonstrated that consumers became quite cautious (Figure
2).
Figure 2
Figure 1
Personal Consumption Contributions
Personal Saving Rate
Percent Contribution to Real GDP
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
Disp. Personal Income Less Spending as a Percent of Disp. Income
12%
12%
Personal Saving Rate: May @ 5.3%
Personal Saving Rate, 12-MMA: May @ 5.3%
10%
Nondurable Goods: Q2 @ 0.9%
Durable Goods: Q2 @ 0.6%
Services: Q2 @ 1.4%
-3%
-4%
98
00
02
04
8%
8%
6%
6%
4%
4%
2%
2%
-3%
-4%
96
10%
06
08
10
12
14
16
0%
0%
92
94
96
98
00
02
04
06
08
10
12
14
16
Source: U.S. Department of Commerce and Wells Fargo Securities
Why Was Q2 PCE Spending So Robust?
Consumer
spending
bounced back in
the second
quarter after a
disappointing
start to the year.
Consumer spending bounced back in the second quarter after a disappointing start to the year,
rising 4.2 percent on an annualized basis in Q2. Monthly data for the second quarter, both from
the real retail sales report as well as from the monthly Personal Income and Spending report,
seem to convey that automobile demand came back in April and May of this year, which is
corroborated by the monthly automobile sales data.
Another sector of consumption that improved considerably during the first two months of the
second quarter was food and beverages purchased for off-premises consumption. This
nondurable goods sector improved 1.1 percent in May after posting a rate of growth of
0.96 percent in April. This sector’s performance was relatively strong during the first quarter, but
the first two months of the second quarter have been much stronger.
Health care consumption was relatively weak during the first two months of the second quarter
after a strong performance at the end of last year and the first quarter of this year. This sector is a
very important component of both services PCE as well as overall PCE, representing almost
26 percent and 16 percent, respectively. Thus, a weak health care consumption sector has an
outsized impact on the overall performance of PCE and thus GDP.
Another sector that has been very weak since the beginning of this year has been recreational
services consumption. This sector of services consumption surged during the second half of last
year, but it has weakened considerably during the first five months of this year. Recreational
services consumption is, however, a very small part of services consumption and even smaller
PCE consumption sector. It represents almost 6 percent of total services consumption but only
about 4 percent of PCE.
Outlook for H2
The consumer outlook for the second half of the year remains positive. Economic fundamentals
are still supportive of U.S. consumer demand and we expect them to remain positive during the
second half of the year. Although employment growth downshifted in April and May, June’s
strong employment report should reassure analysts that the U.S. economy and particularly
consumer spending will remain the major lifeline for economic growth going forward. Our
expectation is that job growth will remain robust in the months ahead, averaging around
175,000 jobs per month. The continued pace of job gains and a modest inflation environment
should also help to lift real disposable income. Real disposable income is expected to continue to
2
Midyear Consumer Spending Outlook
August 01, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
grow at current rates of growth of around 2.7 percent, helping to keep the U.S. consumer engaged
in the economy (Figure 3). Here is where a potential increase in gasoline prices or an overall
acceleration in overall inflation could have negative effects on consumer demand during the
second half of the year; however, our inflation forecast remains benign with the probability of
much higher inflation remaining low.
Credit conditions have also continued to improve with the all-important revolving credit segment,
i.e., credit cards, improving even though the absolute level of outstanding revolving credit
remains below the pre-recession peak. At the same time, interest rates are expected to remain
low for the reminder of the year as we expect the Federal Reserve to increase interest rates only
once this year, in December. This means that demand for credit is also expected to improve as we
have seen during the past several years with credit card borrowing helping to complement
disposable income especially if consumer confidence continues to improve.
The consumer
outlook for the
second half of
the year
remains
positive.
Finally, there is some reason to believe that the rate of saving is likely to start coming back down,
given the recovery in per capita real net wealth (Figure 4). Should this lower rate of saving
materialize, we would expect further support to real consumer spending over the next few
quarters.
Of course, this does not mean that the second half is devoid of risks. The presidential election
cycle, already under way, is expected to continue to generate uncertainty that could affect
expectations about the future and thus the future pace of PCE and GDP growth. In the coming
months, we will be paying particularly close attention to the Conference Board’s and the
University of Michigan’s consumer confidence measures to get a better sense of how consumers
are responding to current events and market conditions. However, assuming our outlook for
employment and income are in the ballpark, we expect consumers to remain in the driver’s seat of
the economy as they have been over the past several quarters.
Figure 3
Figure 4
Real Disposable Personal Income
Bars = CAGR
12%
Real Per Capita Household Net Worth
Line = Yr/Yr Percent Change
Thousands of USD; Savings as a Percent of Disposable Income (Inverted)
12%
$280
0%
9%
9%
$250
2%
6%
6%
$220
4%
$190
6%
$160
8%
$130
10%
$100
12%
$70
14%
Forecast
3%
3%
0%
0%
-3%
-3%
-6%
-6%
-9%
-9%
-12%
-15%
-12%
Real Disp. Personal Inc. - CAGR: Q2 @ 1.2%
-15%
$40
-18%
$10
Real Per Capita Net Worth: Q1 @ $249,073.6 (Left Axis)
2002
2004
2006
2008
2010
2012
2014
2016
16%
Saving/Disposable Income: Q1 @ 5.7% (Right Axis, Inverted)
Real Disp. Personal Inc. - Yr/Yr Percent Change: Q2 @ 2.4%
-18%
2000
18%
60
65
70
75
80
85
90
95
00
05
10
15
Source: U.S. Department of Commerce, Federal Reserve Board and Wells Fargo Securities
3
Midyear Consumer Spending Outlook
August 01, 2016
WELLS FARGO SECURITIES
ECONOMICS GROUP
Conclusion: The Way Forward
We continue to
expect real
consumer
spending to grow
2.6 percent in the
third quarter and
2.0 percent in the
fourth quarter of
this year.
With a rocky start to the year for real consumer spending, growth bounced back in the second
quarter to 4.2 percent, putting to rest near-term fears that consumer spending is slowing. The
backdrop for U.S. consumer demand remains positive for the second half of the year with
monthly job gains around 175,000 per month and real disposable income growth averaging
around 2.7 percent (Figure 5). Thus, we continue to expect real consumer spending to grow
2.6 percent in the third quarter and 2.0 percent in the fourth quarter of this year (Figure 6). While
there remain risks of stock market volatility and the possibility for some erosion in consumer
confidence as the year progresses, we remain optimistic that consumer spending should remain a
key support to headline GDP growth through the end of this year.
Figure 6
Figure 5
Nonfarm Employment
Real Personal Consumption Expenditures
Thousands of Employees, Average Monthly Change
400
400
8%
200
200
6%
0
0
Bars = CAGR
Line = Yr/Yr Percent Change
8%
6%
Forecast
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
Forecast
-200
-200
-400
-400
-600
-600
-800
-800
-6%
Nonfarm Employment: Q2 @ 147.3K
-1000
2000
-1000
2002
2004
2006
2008
2010
2012
2014
2016
-8%
2000
-6%
PCE - CAGR: Q2 @ 4.2%
PCE - Yr/Yr Percent Change: Q2 @ 2.7%
-8%
2002
2004
2006
2008
2010
2012
2014
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities
4
2016
Wells Fargo Securities Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
(704) 410-1801
(212) 214-5070
diane.schumaker@wellsfargo.com
John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
john.silvia@wellsfargo.com
Mark Vitner
Senior Economist
(704) 410-3277
mark.vitner@wellsfargo.com
Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
jay.bryson@wellsfargo.com
Sam Bullard
Senior Economist
(704) 410-3280
sam.bullard@wellsfargo.com
Nick Bennenbroek
Currency Strategist
(212) 214-5636
nicholas.bennenbroek@wellsfargo.com
Anika R. Khan
Senior Economist
(704) 410-3271
anika.khan@wellsfargo.com
Eugenio J. Alemán, Ph.D.
Senior Economist
(704) 410-3273
eugenio.j.aleman@wellsfargo.com
Azhar Iqbal
Econometrician
(704) 410-3270
azhar.iqbal@wellsfargo.com
Tim Quinlan
Senior Economist
(704) 410-3283
tim.quinlan@wellsfargo.com
Eric Viloria, CFA
Currency Strategist
(212) 214-5637
eric.viloria@wellsfargo.com
Sarah House
Economist
(704) 410-3282
sarah.house@wellsfargo.com
Michael A. Brown
Economist
(704) 410-3278
michael.a.brown@wellsfargo.com
Jamie Feik
Economist
(704) 410-3291
jamie.feik@wellsfargo.com
Misa Batcheller
Economic Analyst
(704) 410-3060
misa.n.batcheller@wellsfargo.com
Michael Pugliese
Economic Analyst
(704) 410-3156
michael.d.pugliese@wellsfargo.com
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Economic Analyst
(704) 410-3281
julianne.causey@wellsfargo.com
E. Harry Pershing
Economic Analyst
(704) 410-3034
edward.h.pershing@wellsfargo.com
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Economic Analyst
(704) 410-3059
may.tysinger@wellsfargo.com
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Executive Assistant
(704) 410-3279
donna.lafleur@wellsfargo.com
Dawne Howes
Administrative Assistant
(704) 410-3272
dawne.howes@wellsfargo.com
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