Howes: In virtuous circle, recession threat eases as income gains widen
The Spartans may be headed to college basketball’s Final Four, but it’s the University of Michigan that's delivering great news on the economy.
Its widely tracked Survey of Consumer Sentiment is reporting record income gains in March for the lower two-thirds of the nation’s income distribution, suggesting that it’s not just the rich getting richer in this long-running economic expansion. It's the broadest cohort of consumers to report income gains since 1966, signaling the economy has more room to grow.
The equity markets seem to think so, with the Dow Jones Industrial Average opening the second quarter Monday with a nearly 330-point gain, in part on strong manufacturing data and hopes the Federal Reserve could cut interest rates before the end of the year. The Trump administration seems to think so as it urges more Fed rate cuts and rhetorically pushes the likes of General Motors Co. to reverse plans to idle four plants in three states.
Meaning that talk of recession just in time for the next presidential campaign may be premature, notwithstanding trade policy uncertainties, Brexit ambiguity, President Donald Trump's threat to close the U.S. border with Mexico, an emerging slowdown in auto sales and corresponding production cuts hitting states like Ohio and Michigan disproportionately.
"Consumer confidence has remained very strong during the past two years, with record proportions of consumers now citing income gains and low inflation," Richard Curtin, a Michigan economist and director of the surveys, said in a statement. "Nonetheless, consumers have continued to voice their dissatisfaction with increases in price and interest rates on homes and vehicles purchases.
"The level of resistance suggests that consumers will remain a force in keeping future inflation and interest rates at low levels. Unlike the past, when consumer behavior acted to promote booms as well as busts, consumers now act to diminish excesses. It is the consumer rather than the Fed who now takes away the punch bowl just as the party gets going."
Fifty-six percent of all consumers surveyed in March reported improved finances, with their expected gain of 2.6 percent on track to be the highest such reading since 2007. Consumers voiced "the most positive outlook for the national economy since the Great Recession," a potentially potent argument the president likely will pound repeatedly on the campaign trail.
Less potent would be a reckoning for Detroit's automakers linked to Trump's whipsawing trade policies. Detroit's comparative success is a symbol of industrial might the president happily touts — when he isn't denouncing one of them for daring to align unprofitable excess plant capacity with market demand.
In a note Monday, Morgan Stanley says "GM hype has died down significantly" because of risks from "decelerating U.S. sales and a weak China." And while Ford Motor Co. "is clearly the most unloved" U.S. automaker among investors," a change in tone "is starting to give the company the benefit of the doubt."
Among the reasons: the Blue Oval reached outside the ranks of its clubby finance operation to woo a tech-savvy CFO from the executive ranks of Amazon.com Inc. And, second, Ford's continuing partnership talks with Germany's Volkswagen AG and India's Mahindra Group signal the Dearborn automaker is reckoning with its weaknesses.
Still, the positive macro-economic outlook telegraphed by consumers in the Michigan survey is likely to be tempered in Michigan and other auto states by restructuring at GM and Ford. That includes lower production volumes for suppliers, potential confrontations with the United Auto Workers in national contract talks later this year, and continued sparring with Trump over any moves that contradict his "manufacturing-jobs-are-coming-back" narrative.
The wild card is uncertainty. Markets are surging because the Fed halted its interest-rate increases, because the trade tensions between the United States and China appear to be easing, because the feared cataclysm of the United Kingdom leaving the European Union in a "Brexit" keeps getting postponed, because incomes are rising, confidence is high and overall inflation remains comparatively muted.
But things can change, quickly, in an economy fueled by information moving at the speed of the internet. CEOs can restrain corporate investment. Individuals can rethink home renovation plans or buying that second new car should interest rates rise meaningfully. And government policy, especially when its delivered by tweet, can shape sentiment — often negatively.
That's our world. Better get used to it.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.