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November 25, 2012 6:59 pm
Early reports of robust retail sales over the Thanksgiving holiday have highlighted a crucial divide in the US economy between confident consumers and cautious companies.
Since the summer, a chasm has opened between consumer and business confidence, with the Michigan index of consumer sentiment up 30 per cent on a year ago while the ISM measure of business attitudes is flat or down.
The gap shows how a rally in share prices, a turn in the housing sector and a pick-up in the jobs market have bolstered consumers, while the slowdown in China and fears about an imminent showdown over US fiscal policy have scared businesses.
However, big gaps between business and consumer confidence seldom last. The fate of the world’s biggest economy in 2013 may depend on whether consumers match the gloom of their employers or companies catch the more cheerful mood of their staff.
The early signs from retail sales on “Black Friday” (a term coined to refer to problems caused by traffic chaos and overcrowding) suggest that consumers are holding their ground, at least for now, although a wobble may be on the way. A daily index of consumer sentiment produced by pollster Rasmussen has fallen from 98 on election day to 87.7 last Wednesday.
“Consumers act local, businesses think global,” says Steve Blitz, chief economist for ITG Investment Research in New York. “While consumers are likely [to be] aware of the economic problems of the world and the impending issues with US fiscal policy, what they own to earn income is their labour.”
A better jobs market means happier consumers, says Mr Blitz, and their relative cheeriness is clear in the growth data. Consumers have sustained the economic recovery by contributing more than one percentage point to gross domestic product growth in each of the past five quarters.
US economic growth is far from solid, however. In the third quarter, overall annualised economic growth was 2 per cent; analysts expect the fourth quarter to be closer to 1 per cent.
Analysts at Goldman Sachs reckon that most of the rise in consumer sentiment has been caused by a higher stock market and lower petrol prices; they predict sustained improvement in 2013.
However, chipper consumers will only stay that way if companies keep adding jobs in what is still a sickly economy, and business is none too happy.
“As for business, what they own to produce income is their product,” says Mr Blitz. “Business has become increasingly global in their reach and the world outlook is now decidedly less upbeat thanks, in large part, to the ongoing opera known as the euro and increased uncertainty over China's economic growth and social stability.”
That pessimism is again visible in the GDP data. Growth in business fixed investment has declined in each of the past three quarters to the point where it is barely making any contribution to expansion at all.
Jim O’Sullivan of High Frequency Economics in New York says the seeming divergence comes down to how employers are behaving in the jobs market.
“The problem with the story about consumer and business sentiment is the lack of obvious new weakening in the employment data,” he says. When businesses are slashing capital expenditures they are usually slashing staffing as well.”
The weakness of capital spending might be because it is closely linked to the export market. “But something has to give. Either capex is likely to start moving up again or employment will have to slow,” he says.
The force that is likely to drive consumer and business confidence back together is the fiscal cliff of tax rises and spending cuts due at the end of the year. A resolution will cheer business; a messy one could damp consumer hearts.
It is often at economic turning points that consumer and business confidence diverge. It will be politicians in Washington, most likely, who decide which way the economy heads now.
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