Why US Household Spending Puts an Interest Rate Hike at Risk

The US economy is in a bit of bother. Household spending expectations are set to plummet over the next year. In a consumer driven economy, where 70% of GDP comes from spending, that’s a big problem.

Just how bad is the outlook for spending?

Household growth expectations for the year ahead fell to 3.5% in July. That’s down from 4.3% in June. It’s the lowest recorded figure since records began two years.

It goes without saying that this doesn’t bode well for the ongoing US ‘recovery’. And it puts the recent positive jobs data into context. The US economy might be creating new jobs. But weak wage growth is weighing on spending habits.

The situation is even worse when we adjust for inflation. Inflation-adjusted household spending expectations fell by 60% in July. That’s a massive decline since 2013. In just two years, real household spending fell from 5.5% to 0.5%.

What does all this mean for the US economy?

In the short term, it tells us the chances for a September rate hike are slim to none. Even a December rate rise is unlikely.

It’s also a problem for the Aussie economy. The Reserve Bank is pinning its hopes on the US Fed coming to our rescue.

Devaluing the Aussie dollar below $0.70 is one of the RBA’s chief aims. Achieving this, without the help of US policymakers, won’t be easy. The RBA wants US interest rates to lift the value of the greenback. In turn, that’d put downward pressure on the Aussie dollar. But that game plan depends on US interest rates rising. Without this, it’ll make the RBA’s job that much more difficult.

US Household spending by income bracket

You might think that low income earners shoulder the blame for falling spending expectations. But that couldn’t be further from the further. In fact, households earning under US$50,000 are most upbeat. Their expectations haven’t changed much at all in the last four months.

The biggest drops come from those earning above this threshold.

Households earning between US$50,000–100,000 are mostly to blame. Their expectations dipped below 3% for the first time since 2013.

But the sharpest fall came for households earnings above US$100,000. Their expectations dropped by 1% month-on-month. This bracket now sits just above 3%.

The takeaway is that the biggest earners are the most reluctant to spend. That’s worrying for the US economy looking ahead.

I’ve already mentioned that consumer spending accounts for 70% of US GDP. If spending expectations keep falling, what does that tell us? It says that the US economy is heading for trouble.

A recession is all but inevitable if household spending doesn’t recover soon. And it quashes any idea of an incoming rate rise. Unless spending outlooks improve shortly, there’s no chance of that happening.

Not that the Fed is ignorant of what’s at stake. After all, this data comes straight from the New York Federal Reserve. Their own figures are telling them that things are bad.

Don’t expect any decisions on US rates until next year.

And you can forget about an Aussie dollar below US$0.70 for the time being.

Mat Spasic,

Contributor, Markets and Money

PS: The RBA won’t prop up the Aussie economy by pushing for a cheaper dollar. Without US rate hikes, its best bet is some way off. But it’s not just the US facing a recession down the line. Australia has its own problems to think about.

Markets and Money’s Greg Canavan believes Australia’s economy is heading for disaster. He says we’re on course for our first recession in 23 years.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show how debt levels have spiralled out of control. And why that means a recession is almost inevitable.

But there are actions you can take to lessen the impact of the recession.

Download your free copy today to learn how to protect your wealth from the fallout of the crash. To find out how to download his free report right now, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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