U.S. Economy Inching Closer To A Recession?

U.S. Economy - What Caused The Consumer’s Uncertainty?

Preliminary May consumer sentiment reading and the expectations index hit a 15 year high. Both will likely come down when the final reading is released because of the newly implemented tariffs. The chart below reviews why consumer spending fell earlier in the year. 

As you can see, for those making below $50,000 per year and for those making between $50,000 and $125,000 annually, the biggest issue was the government shutdown. The good news is it’s over. The bad news is there could be another related issue this fall because the debt ceiling wasn’t raised after it was hit in March.

(Click on image to enlarge)

Delayed tax refunds also hurt spending. Consumers view tax refunds as ‘found money’ which means they spend the money right away. That’s why any delay in tax refunds can significantly impact retail sales. This explains why the weak April retail sales reading was blamed on the consumers getting less tax refunds than they expected. The benefit of lower taxes was evenly distributed last year. 

Consumers formed budgets based on how much taxes were taken out of their paychecks. To be clear, the benefit of the tax cut is greater than the impact of smaller refunds. 

Impact of the trade war will soon wipe away the tax cut gains for the middle class.

It will be interesting to see how consumers react to this indirect tax increase. If they react negatively swiftly, then President Trump’s power in the negotiations with China will be diminished. He always likes to play up how the trade war is helping the American economy and hurting China. 

In this sense, short term negative news would be good for the intermediate term. It could end trade war.

Finally, the stock market was the biggest factor for those making more than $125,000. It’s a big problem when this group stops spending money because they have the most disposable income per person. They have the most assets which is why the stock market affected them the most. 

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