Since the end of September, retail sales have flatlined, motor vehicle sales have fallen, consumer confidence has continued to slump, real wages growth has stalled and the household savings rate has declined.
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It is conceivable, therefore, that the data doesn’t capture what consumers have been complaining about, which is an affordability crisis.
It’s also may be the case that there are two Americas.
In one, with the sharemarket and property markets buoyant, the wealthy households exposed to them – particularly those with any exposure to anything AI-related – are feeling very positive and spending freely. Real personal consumer spending rose 3.5 per cent in the quarter, accelerating from the June quarter’s 2.8 per cent growth rate.
In the other, middle and lower-income households are under pressure, with no real wages growth to offset the higher prices being driven by Trump’s tariffs. The Commerce Department’s report revealed that there was zero growth in personal disposable incomes in the third quarter.
The US Federal Reserve Board’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) index, rose 2.8 per cent in the third quarter, up from 2.1 per cent in the preceding three months. Core PCE, which excludes volatile food and energy prices, rose from 2.6 per cent to 2.9 per cent.
The growing gap between the wealth and spending patterns of the wealthiest households and the less wealthy, who are struggling to absorb the price increases, has led to the US being described as a “K-shaped” economy: one where asset-rich high-income earners thrive while low-to-middle income households struggle with slow wage growth and inflation.
An analogous picture has emerged in business investment.
Small and medium-sized businesses are struggling as their input costs have been driven up, with the tariffs a significant influence, and gross private domestic investment was actually falling in the September quarter, by 0.3 per cent, despite big increases in investments in equipment and intellectual property.
The AI investment boom is, it seems, holding up business investment by itself, which isn’t surprising given the sheer scale of the numbers involved. There are estimates that it accounts for as much as a half the economic growth this year.
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The so-called “hyperscalers” – Google, Meta, Microsoft, Amazon and Oracle – will spend about $US400 billion ($600 billion) this year and more than $US500 billion next year. By 2030, assuming the boom continues, the total might breach $US4 trillion. That will drive growth, albeit probably not many jobs.
Net exports, negative in the June quarter but up 8.8 per cent in the September quarter, continued their volatile pattern this year as Trump’s ever-changing tariffs caused big swings in imports, which fell really heavily (29.3 per cent) in the second quarter and were down 4.7 per cent in the third.
Not too much can be definitively said about those numbers, given how erratic they have been and that it wasn’t until August that the core of the tariffs were operative.
That, of course, didn’t stop Trump from claiming that it was his tariffs that produced the economic growth.
“The TARIFFS are responsible for the GREAT USA Economic Numbers JUST ANNOUNCED,” he posted on Truth Social, adding that the numbers would only get better.
Separately, he once again argued for lower interest rates and said he would never appoint a new Fed chair who wasn’t prepared to lower them. Trump will be able to nominate the next Fed chair when Jerome Powell’s term ends next May.
Jerome Powell’s tenure as chair of the Federal Reserve is set to end in May.Credit: AP
He might be disappointed. The apparent strength of the economy and the continued edging up of the Fed’s preferred inflation measure are more likely to encourage the Fed to watch and wait than lower rates early next year.
That could make for some interesting tensions within the Fed if the majority of the voting members of the Open Market Committee that votes on US monetary policy disagree with their new chair.
After the data was released, financial markets priced in a lower probability of a January rate cut as well as of the prospect of a rate cut in the first quarter.
When the December quarter data is available it is likely to shed even less light on the underlying state of the US economy than the current release.
Collection of the data will have been far more significantly impacted by the shutdown that ended on November 12, so we might have to wait until well into next year before a true picture emerges of the impact of Trump’s tariffs, the effects AI investments are having on the structure of the jobs market and get a better sense of whether the Fed is more concerned about jobs or inflation.
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