Can US consumers hold up the world economy?

MUCH has been touted lately on the strength of the US consumer but for how long can this so-called last leg of the economy hold up and buffer the world economy?

As manufacturing and investment are showing declines, much hope is placed on the strength of US consumption which makes up 70% of the economy, but is showing signs of a possible cooling off.

The unexpected decline in US September retail sales has raised fears that the manufacturing recession could be spilling over to the broader economy.

Instead of a projected 0.3% growth rate, US retail sales fell 0.3% from August, to US$526 bil, said the Commerce Department.

This compares to growth of 0.6% and 0.7% in August and July respectively.

Representing the first decline since February, US consumers slashed purchases of building materials, online purchases and especially automobiles.

“We may have a hint of what lies ahead from the advanced retail sales data which dipped significantly instead of continuing to rise monthon-month,’’ said Inter-pacific Securities head of research Pong Teng Siew.

Any further US tariffs especially on Chinese consumer goods could impact consumer spending, as anxiety over consumer debt, recession and slower jobs growth takes hold.

Under the limited Us-china trade deal called Phase One, the US holds off a tariff hike from 25% to 30% on Us$250bil of Chinese goods. If China fails to seal that deal, the warning is that a new round of tariffs could still come up on Dec 15 on Us$156bil of Chinese imports.

In September, consumer goods were hit by 15% tariffs on more than US$125 bil of Chinese goods, including smart speakers, Bluetooth headphones and various types of footwear.

Tariffs of 15% on cellphones, laptop computers, toys and clothing are to take off on Dec 15.

Prolonged trade tensions have taken a heavy toll on exports of regional economies, causing a slowdown in the trade sector and a downturn in manufacturing and investments.

Singapore’s exports shrank 8.1% for the seventh straight month in September, largely due to a sharp fall in electronic shipments.

Exports from Indonesia fell 5.7% year-onyear in September, as oil and gas exports tumbled and sales of non-oil and gas products also dropped.

For the fifth time, the International Monetary Fund has slashed its global growth forecast to a decade low of 3%, warning that a “much more subdued pace of global activity could well materialise.” Uncertainty over prospects of several emerging markets, a projected slowdown in China and the US, and prominent downside risks may take hold and lower global growth further.

A series of monetary and fiscal stimulus has kicked in to beat the slowdown and hopefully, avoid a recession.

After battling US interest rate hikes and a strong dollar last year, emerging central banks across a group of 37 developing economies have initiated a net 11 rate cuts last month, said Reuters.

That is the largest number of rate cuts since monetary easing was ramped up to stimulate growth.

Among bold fiscal measures, India made a surprise Us$20bil tax cut, where the top corporate tax rate was reduced to 22% from 30%; companies involved in manufacturing and registering from Oct 1, will pay an effective tax rate of 17%.

“Domestic demand will lose steam if the new round of monetary and fiscal stimulus fails to work to prevent a slowdown in global growth,’’ according to Socio Economic Research Center executive director Lee Heng Guie.

US consumer spending has been holding the fort, thanks to a strong labour market as well as highly accommodative rates and credit facilities that ease households’ debt servicing and spur consumer lending.

As growth in consumption outpaces that of income, US household debt has hit a record of US$13.86 trillion in the second quarter, compared with US$12.68 trillion in 2008.

The Conference Board’s consumer confidence index which reflects consumers’ attitudes towards the overall economy will be closely watched.

Many will be alert to signs of recession if that index starts to decline significantly and joins the signal from the University of Michigan’s consumer sentiment index in indicating a less-confident consumer, said a Marketwatch opinion piece.

In the near term, the consumer is likely to continue spending as global policymakers are still in an easing mode to support growth.

The global economy is likely to continue growing although at a more moderate pace in 2019/20, weighed down by trade tensions, said RHB Institute chief Asean economist Peck Boon Soon.

But a splurge in spending comes with a huge side effect of further increasing the household debt burden.