The Resilient Consumer

If you’re trying to know where the American economy is going, your first step should be to put yourself inside the head of the American consumer.

According to The Wall Street Journal, almost half of American consumers are unaware that the return to higher Social Security tax withholding on January 1 meant an effective 2% pay cut. About 48% of workers didn’t notice the change in their 2013 paychecks; 59% of lower-income workers, those most likely to have no cushion, didn’t notice. Only 26% of low-income households, and only 30% of all households, have reduced spending in response.

Add in uncertainty about the future course of government policy, both in America and internationally, and you’d expect consumer spending, which is responsible for roughly 70% of GDP, to be static, if not falling. Instead, after adjusting for inflation, it grew at roughly a 3% annual rate in January and February. The numbers may be skewed by a few anomalies, but even with March’s slight downtick, spending growth in the first quarter was relatively strong. What’s more, the Thomson-Reuters/University of Michigan index of consumer confidence rose more than expected in March, likely because of the strength in hiring and housing.

But there are downsides. March’s job growth was an anemic 88,000, dramatically smaller than the consensus view that non-farm payrolls would grow by 200,000. And the effects of the sequester’s large cuts in jobs and pay, directly on government workers and indirectly on the employees of government contractors, have yet to be felt.

We think that further growth in consumer spending, and therefore further GDP growth, is dependent on the private sector adding jobs at an accelerating pace through the spring. Stay tuned for April’s numbers at the end of the first week in May.

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