Macro insights

Coronavirus and the U.S. Consumer

The resilience of the U.S. consumer has underpinned the economy in recent years. But the shock caused by the coronavirus outbreak could be sizable – and a direct policy response should be used to help households, in our view.

Sources: BlackRock Investment Institute, U.S. Bureau of Economic Analysis and Conference Board, with data from Refinitiv Datastream, March 2020. Notes: The bars show the breakdown of real U.S. personal consumption expenditure in services (orange) and goods (yellow) in seasonally adjusted annual rates of growth on a monthly basis. The green line shows the three-month moving average of Conference Board consumer confidence expectations for the next six months.

Last week’s employment report pointed to robust growth in nonfarm payrolls. A 50-year low in the unemployment rate and strong real wage growth underscored that U.S. consumers started 2020 in a position of strength.

Most of the growth in personal consumption after 2008 has been on services spending, which has remained relatively stable while goods consumption has fluctuated. See the chart above. Robust consumer spending growth has gone hand in hand with strong surveys of consumer confidence. Recent surveys from the Conference Board and University of Michigan remained at their seven- and nine-month highs respectively. And consumption growth has not come at the expense of savings – the household saving rate is close to its post-crisis high. Consumer spending appears to be well-positioned to absorb some shocks to the U.S. economy. And households are taking advantage of the drop in interest rates to historic lows, with a sharp spike in applications for mortgage refinancings last week – also a boon to incomes. On Friday, the preliminary consumer sentiment survey published by the University of Michigan will provide another opportunity to check in with the health of the U.S. consumer.

Consumers may be worried by volatile equity markets. And households may start to spend a lot less on travel, hospitality and leisure to lower their contagion risk.  Even before the outbreak, household debt levels reached a 14-year high at the end of 2019, and the Senior Loan Officer survey released in early February shows a modest tightening of consumer credit standards.

The safety net for U.S. workers who fall ill or lose their jobs in the wake of the outbreak should be reinforced, in our view. Protecting household income through sick-pay, short-time work support and unemployment benefits in the face of virus-disruptions will likely be a focus for policymakers. The UK has taken a step in that direction. The Bank of England on Wednesday cut rates on an emergency basis and launched a new lending facility aimed a small- and medium-sized enterprises on the same day the government unveiled an expansionary budget with an array of coronavirus relief measures. That shows what a coordinated monetary and fiscal approach can look like.