One Man’s Opinion: Is Balance-Sheet Repair Delaying Consumer Spending Pick-Up?

The revised Q1 GDP reading is not indicative of the underlying growth trend in the US economy, said Alan Krueger, professor of Economics and Public Affairs at Princeton University. Investors would be wise to look past the first-quarter numbers as there were some special factors such as very bad weather in the North East, labor disputes on the West Coast and a stronger dollar that impacted exports.

But fundamentally, the US economy is continuing to expand; the job market has witnessed a strong growth – April’s job numbers were solid and unemployment claims were at a 15 year low, indicating the economy is on a path to recovery in the US, he noted.

Despite a strong job growth and a plunge in oil prices, consumer spending in the US is yet to pick up pace. Asked to explain, Krueger said despite adding more than 200,000 jobs in 12 of the past 13 months that pushed up the Employment Cost Index 2.8 percent in the past 12 months, spending – particularly on discretionary items, has been weak. But spending on durable goods has been quite healthy, particularly over the whole recovery.

Consumers are probably waiting around to see how durable the recovery is while repairing their balance sheets. Wealth has been restored above to where they had been before the financial crisis struck. American consumers are in a stronger position and there is also room for the housing recovery to expand even with higher interest rates, he explained.

Asked if US consumers are worried that oil prices may rebound and move higher, Alan said it’s possible that equilibrium prices settle at higher levels from the $40/barrel witnessed a few months ago. But on net, the US is an importer of oil, so lower price of oil is good for the economy overall and good for the consumers, which will filter through to higher consumption in the months ahead, he observed.

Asked if a rate hike in September is possible, Alan answered in the positive, adding that really doesn’t matter very much.  What’s more important is how fast the Fed moves after they pull the trigger. The important message is the economy is on a path to more normal monetary policy, though the Fed is likely to move more slowly. Monetary policy would still be accommodating for several quarters to come, but the economy is getting strong enough that it needs less support from monetary policy, he argued.

Asked if companies like Uber are bad for the economy as many people argue they are the recipe for low wage jobs, Alan said, historically, most technological advances have been replacing labor.  Although skilled labor benefitted from technological progress, demand for less skilled workers declined. But when it comes to ride-sharing services, it’s actually the opposite where more people are taking rides and using the service, which is good for the people who provide those services.

One might be concerned a lot of the workers are independent contractors in this area, but that’s also true for taxi-cab drivers for most of the US. So, it’s unlikely to have an adverse effect on their bargaining power; the main effect has been to raise demand for overall drivers, he concluded.

You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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