WASHINGTON — As President Trump considers tax cuts to bolster a weakening economy and his reelection prospects, the financial wild card may be the American consumer.
Consumer spending of late has outperformed expectations, compensating for the softness in business investments, manufacturing and net exports due largely to Trump's trade war with China.
"The consumer continues to be the Atlas holding up the economy," said Jack Kleinhenz, chief economist for the National Retail Federation.
But for how long?
The United States this summer broke the record for the longest economic expansion. Many economists, however, now see a recession — typically defined as two or more consecutive quarters of declining output — hitting next year or in 2021.
While consumer spending has been supported by a tight labor market, rising incomes and relatively low debts, the recent upheaval in financial markets and some key indicators flashing red have begun to weigh on consumers' moods. And sentiments can be both contagious and self-fulfilling.
One closely followed national survey, by the University of Michigan, saw a sharp drop in consumers' expectations earlier this month, shortly after the Federal Reserve cut interest rates and Trump announced more tariffs on China.
By historical measures, consumer confidence remains high, but the survey's director, Richard Curtin, noted that demand already was softening for some large discretionary items, including early-warning indicators like recreational vehicles.
As it is, Americans have been socking away more money. In recent months the personal saving rate, the amount of after-tax income that isn't spent, has been hovering around 8%, the highest in several years.
Consumers haven't yet turned from uncertainty to pessimism, Curtin said, but are taking their cues from people like Federal Reserve Chairman Jerome H. Powell. "They're thinking, 'If he's going to be more cautious, so should I.' "
The Fed, worried about trade and the global outlook, shaved a quarter-point off its benchmark interest rate on July 31. Financial markets are expecting much more, and Trump is demanding it.
Fed rate cuts could help ease recession fears, which have intensified with Trump's escalation of tariffs and weaker economic data from Europe and China. What's more, yields on 10-year Treasury notes have kept falling, briefly slipping below yields on two-year notes — a scenario considered a harbinger of a downturn.
Economists say economic expansions don't die of old age, but longevity isn't irrelevant either when it comes to things like purchases of new cars. For years auto sales were fueled by pent-up demand from the Great Recession, but have since peaked and as such can't be expected to keep growing.
Similarly, home prices nationally have risen to a point that could slow an already lackluster housing market. Less home-building has meant less for furniture and appliance dealers.
Fed rate cuts could help lift the market, but it won't have a "wow factor," said G.U. Krueger of Krueger Economics, a housing research consultant in Los Angeles.
Availability of credit hasn't been a problem for most businesses and households. The good news, he noted, is that there aren't a lot of financial imbalances or excesses in the economy. Unlike the last downturn, homeowners aren't mortgaged to the hilt.
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Retailers and other businesses, however, worry that Trump's new tariffs on many household goods made in China will only make things worse for consumers.
About a third of some $300 billion of Chinese imports — including athletic footwear, coats and electronics like televisions sets — face additional 10% tariffs.
Trump delayed tariffs on most of the rest, including laptops and cellphones, to Dec. 15, saying he didn't want to endanger the Christmas shopping season.
At the same time, he has sounded more enthused about tariffs and his trade fight with China in recent days.
If the new tariffs do take effect, some companies may end up eating the higher costs to maintain market share. But for products like video game consoles, where China dominates 98% of the $5-billion import market, consumers are almost certain to absorb at least some of the hit, said Shawn DuBravac, president of the research firm Avrio Institute and former chief economist at the Consumer Technology Association.
"While the consumer is doing very well, you do have an environment where the consumer is also cautious and could easily retreat if uncertainty is high," he said.
No one knows how much the trade war has already cost American businesses. Many say they have suspended or curtailed investments; some are rerouting supplies; and on the whole corporate profits have fallen this year.
For some companies, the higher costs from the trade war have erased the gains from the Republican tax cuts that Trump pushed for in late 2017.
Trump himself has insisted that the U.S. economy is performing very well. Yet the president has been relentless in hammering the Fed to lower interest rates to bolster growth.
At the same time, Trump has acknowledged that he is looking at a payroll tax cut, among other tax changes, that could put more money into consumers' pockets and stimulate the broader economy.
Scott Hoyt of Moody's Analtyics notes that one of the drivers for spending growth in recent years was expanding net worth of households, the so-called wealth effect. But stock prices today are about where they were 18 months ago, he said, and home prices began to slow last year.
"Financial wealth effects have been particularly large since the financial crisis, so the weakness of the stock market will be a particular weight," he wrote in a research report.
For many consumers, the deciding factor in whether they keep spending at their current pace or pull back is how they view their jobs.
With very low unemployment, jobs have been more secure and wage increases have picked up in the last year, especially for those in the bottom.
Layoffs remain low and job growth, while slowing, is still more than enough to keep up with population increase and prevent the jobless rate from rising. The tricky thing, Krueger said, is that when households cut back, it's often too late.
"Usually consumers are the last ones to jump off the cliff of a recession," he said.