FROM THE DESK OF THE CHIEF ECONOMIST Strong U.S. economy spurs spending in key merchant categories

Wayne Best

May 22, 2017 - The U.S. economy has been expanding for nearly eight years and appears on track to surpass the 10-year record set in the 1990s. Gross domestic product (GDP) growth should accelerate from 1.6 percent in 2016 to 2.4 percent this year (despite some recent flux) and 2.6 percent in 2018.¹ Expected policy changes from the Trump administration, such as corporate and personal tax cuts starting in 2018 and a modest increase in infrastructure spending, should have a positive impact on future growth. Faster business investment—especially in energy—should also help improve economic growth. Despite some instability and polarization among Americans since the U.S. election, consumers are faring very well. Record household wealth, higher wages and job growth are helping to drive gains in overall consumer retail spending, including key merchant categories:

Restaurant spending has accelerated, thanks in part to the strong job market

Growth in restaurant spending has closely followed job growth over the past several years. U.S. employment growth has been robust, with 2-3 million net new jobs created each year in 2014, ‘15 and ’16, prompting wages to go up. Restaurant spending—which outpaced growth of overall retail sales and continues to be one of the strongest merchant categories—showed a parallel uptick. It peaked at over 9 percent growth in early 2015, according to the Visa Retail Spending Monitor, which reports spending on all forms of payment. During that period, job growth was particularly robust with an average of 200,000-300,000 jobs per month. This helped to drive the unemployment rate down to below 5 percent. Recently, job growth has slowed a bit—down to about 180,000 jobs added per month in 1Q2017—and restaurant spending has followed suit. It has been expanding at a 5 percent pace over the past six months, still very strong. After all, dining out is one of America’s favorite past time.

Watch the video below for a discussion on this topic with Chief Economist Wayne Best and Economist Corrine Fusso.

Restaurant spending and job growth

(YoY change, three-month moving average)

Rising prices, especially for gas, are fueling consumer spending growth

Rising prices, especially for gas, help explain much of the robust growth in overall consumer spending— which is expected to increase 4.6 percent this year (unadjusted for inflation), from 3.8 percent in 2016. Gas prices have been growing in the double digits year-over-year (YoY) since December 2016, averaging 30 cents higher in April than a year earlier, an increase of 14 percent. This is having a very real impact on consumer’s discretionary spending, which slowed as gas prices have risen. Ironically, consumer confidence is at a 15-year high—unexpected, given the trend at the pump. Gas prices are also causing an uptick in inflation (they feed into prices for other types of spending, such as transportation of clothing/food, airfare, and others) and could put pressure on the Federal Reserve to raise interest rates more quickly. The Fed has raised rates only three times since the financial crisis, but should take action at least once more in 2017. Although any increases will likely be highly data-dependent, the federal funds rate should reach 1.5 percent by the end of 2017 and 2.25 percent a year later.

Watch the video below for a discussion on this topic with Chief Economist Wayne Best and Economist Corrine Fusso.

Gas prices & discretionary spending

(YoY change)

Strong housing market is prompting many homeowners to spend on remodel projects

The continued strength of the housing market is encouraging many homeowners to remodel, which has helped boost spending at building, hardware and garden stores—growing at an average pace of 6.7 percent YoY over the past six months, according to the Visa Retail Spending Monitor. Home prices are up about 45 percent from their nadir in early 2011, bringing prices nearly back to their pre-recession peak. This is because the supply is not keeping up with demand. In some cities, the housing shortage is causing overbidding, raising concerns about potential bubbles in housing prices. Many homeowners—especially in the west and southwest, where median home prices rose significantly in 2016—have found it makes more sense to remodel their current homes than to enter the competitive housing market. Watch the video below for a discussion on this topic with Chief Economist Wayne Best.

Future outlook

The economy was gaining strength prior to the presidential election. While some of the proposed Trump policies improve the economic outlook, they can also threaten economic stability. Fiscal stimulus—such as tax cuts and infrastructure spending—is historically used to boost demand during times of economic weakness. Unleashing it at a time of economic strength puts the economy at risk of overheating, requiring the Fed to quickly respond in order to keep inflation in check. Other proposals—particularly the replacement of the Affordable Care Act, immigration reform and protectionist trade policies— have put people on edge. Additional risks from abroad—North Korea, Brexit, and Greek debt, just to name a few—could send reverberations throughout the U.S. economy.

Changes in the political landscape have brought about both optimism and uncertainty. Time will tell which is warranted.

¹Real GDP, adjusted for inflation.

Sources: Visa Business and Economic Insights analysis of industry data and projections, including IHS Markit, U.S. Bureau of Labor Statistics, U.S. Energy Information Administration, CoreLogic, Zillow.