As if the retail industry didn’t have enough to worry about this holiday season, the budget impasse in Congress poses a real threat to the consumer economy if the stalemate drags on more than a few days.
If you can believe the rhetoric, we may be in for a marathon. But even if it were to end quickly, the constant drumbeat of distressing news leading up to it may already have shaved a few points off consumer readings that were shaky to begin with.
Historically, government shutdowns have been minor events as far as consumer behavior is concerned. There have been 20 such shutdowns over the past half-century, most lasting a week or less. Aside from lost income for federal workers and contractors, they are quickly forgotten.
The longer ones were more troublesome. One of the longest, in October 2013, took 17 days to resolve. In spite of an economy that was recovering from the Great Recession, growth in real consumer spending took quite a hit, slowing from 4.1% in the third quarter to 2.6% in the fourth, according to data from the Bureau of Economic Analysis (BEA).
The longest shutdown in U.S. history was 35 days, beginning just after Christmas 2018 and lasting into January, during another period of relative economic health. The widely-followed University of Michigan Consumer Sentiment reading in January 2019 plunged by seven points from a fourteen-year high of 98.3 the month before. Real consumer spending slowed from a 2.5% growth rate in the fourth quarter of 2018 to a 0.9% growth rate in the first quarter of 2019.
It would be a mistake to blame budget gridlocks for all of the decelerations that took place during previous episodes. What makes this time different is that the shutdown comes at a precarious moment, near the end of a year of financial turmoil that has left consumers weary and cautious.
A recent pre-shutdown survey by accounting giant PricewaterhouseCoopers (PwC) found that shoppers plan to cut their seasonal spending this year by an average of 5%, “the first notable drop since 2020,” according to emarketer.com.
Meanwhile, consumer sentiment and confidence are in the tank. The University of Michigan reading bottomed in April at 52.2 and the most recent reading—September—was not much better at 55.1, worse than during the Great Recession in 2008.
Similarly, The Conference Board reported in September that its Consumer Confidence Index had notched its largest decline in a year and that since February its Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—has been below the threshold that typically signals a developing recession.
In spite of all this doom and gloom, the S&P 500 stock index is now double what it was in September 2020, and consumers have continued to spend as seen in recent quarterly reports.
Over the past five years, Federal Reserve data show Personal Consumption Expenditures have risen by 45%.
It would be all too easy to say that we are headed into a recession and that we are about to have the economy take a nosedive, but my question is, what are the odds you’re right?
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