The U.S. consumer has “underspent” in the current economic expansion, according to a new research report released by Cushman & Wakefield. However, consumer confidence continues to trend upward, pointing to faster growth in household spending and solid demand for retail, industrial, and hospitality real estate.
In the 72 months since June 2009, when the economic expansion officially began, inflation-adjusted consumer spending has increased 14 percent, or 2.2 percent per year. In the four previous economic expansions (beginning in 1975, 1982, 1991 and 2001), consumer spending increased an average of 3.5 percent per year over the same 72-month period.
The consumer is a critical aspect of U.S. economic growth, accounting for approximately 68 percent of gross domestic product (GDP). According to Cushman & Wakefield, if growth in consumer spending in the current cycle matched the average of the preceding four expansions, U.S. GDP growth during the expansion would have averaged a respectable 3 percent per year instead of the weaker 2.1 percent per-year growth the economy has actually recorded.
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Among the report’s findings:
- Consumer spending has accelerated over the past 18 months after three years of tepid growth.
- An important driver has been an improvement in confidence. The overall level of confidence in the economy has remained high throughout 2015, suggesting that households will increase spending this year.
- Consumers’ views of the current situation are especially healthy, suggesting that most of their hesitancy is a result of uncertainty about the future.
- Demand is growing at a healthy pace. Retail sales, adjusted for inflation, were up 4.8 percent from a year ago in July and sales at GAFO (general, apparel, furniture and other) stores have increased at an annual rate of 8.3 percent from February through June. February was a particularly harsh month weather-wise in the Northeast and much of the Midwest. As sales increase, retail tenants will increase demand for space to meet the growing need from consumers.
- More of the growth in retail sales is being met via the Internet. At the end of the second quarter, e-commerce sales represented 21.1 percent of total GAFO, a record high. This trend is expected to continue and it will inevitably lead to more growth in demand for warehouse and distribution space.
Recently, consumer spending has begun to pick up the pace. After growing at an average rate of 1.9 percent for three years, real consumer spending has expanded by 2.8 percent per year during the past year-and-a-half.
The acceleration in spending has correlated with heightened consumer confidence. In the first four years of the expansion, there was little improvement in consumer confidence as measured by the University of Michigan’s Index of Consumer Sentiment. Consumer confidence rose and fell with economic and political changes over that time.
But in October 2013, the index stood at 73.1, not much higher than the 70.1 reading recorded four years earlier in October 2009. Since October 2013, confidence has jumped rapidly. Today’s reading of 92.9 is 26.9 percent above the level seen in October 2013.
Overall, consumers are much more optimistic today about the current situation than the future.
“Basically the attitude can be summed up as ‘I am a little worried about where things are going, but I am doing fine,’” the report states.
Today, the conditions index is hovering near its highest level since 2007, and consumer spending is rising at the healthiest sustained rate since 2006.
According to the report, the persistence of high levels of optimism about current conditions points to continuing solid growth in consumer spending in 2015 and 2016. Consumers’ personal financial situation is healthy and improving. Strong spending is expected to follow.
Continuing growth in consumer spending will contribute to a stronger economy in the second half of the year. This trend is great news for the economy and for retail and industrial real estate.
Click here to read the full report.
— Haisten Willis