Why American consumers will remain a bright spot in the troubled global economy

US factory output is shrinking, but the economy is holding up because of robust private consumption

One reason why Trump hasn’t backed down in the trade war may be that key battleground states in the presidential election have enjoyed the strongest growth in personal income

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Shoppers wait to enter the Macy’s department store in New York on Thanksgiving Day, November 28. Photo: AFP

Published: 1:00am, 6 Dec 2019Updated: 4:55am, 6 Dec 2019

As the global downturn gains momentum, America’s economy has come under intense scrutiny. Increasing signs that its expansion – the longest in US post-war history – is slowing due to the fallout of the trade war have unnerved financial markets, and have already forced the Federal Reserve to cut interest rates three times this year.

Fresh evidence of decelerating growth emerged on Monday when a gauge showed US manufacturing contracting for the fourth straight month in November. The downturn is now sharper than in China, where official data published last Saturday showed factory output expanding for the first time since April. According to Bloomberg, the US manufacturing sector has not performed this badly, relative to its Chinese counterpart, in a decade.

Yet, America’s economy continues to hold up significantly better than any of the world’s other leading economies, and is still the cleanest dirty shirt in the laundry.

Its relative strength is driven by buoyancy in private consumption, the mainstay of the economy and the engine of global growth in earlier decades.

While manufacturing accounts for 11 per cent of America’s gross domestic product, household spending makes up about 70 per cent. The latest batch of survey data on consumer sentiment shows confidence remaining high, underpinned by historically low unemployment, record high stock prices and extremely accommodative monetary policy.

Indeed, according to the University of Michigan’s consumer sentiment index, levels of optimism over the past three years are the highest they have been since the late 1990s. Consumers, moreover, are far more upbeat than businesses, which have been cutting back on capital investment, citing uncertainty about their supply chains, profits and growth.

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