Output Gap Most Negative Since 1980

This article will pack in as many economic signals as possible without it being too overwhelming. The list below shows 5 groupings of indicators which tell us the likely future performance of the consumer. The situation looks great as 17 out of 18 indicators are favorable and only one is mixed.

Source: Bank of America Merrill Lynch

The first group shows disposable personal income growth and real disposable income growth. Both are up year over year. It’s not surprising income growth is up because the labor market is running out of slack. One example of this is Amazon recently announced it will give its workers a $15 per hour minimum wage. That’s not something you see early in the cycle when there is a high unemployment rate. To be clear, real disposable income growth is usually positive even in recessions. 1.6% growth is still decent considering inflation has increased in 2018.

The second group shows the latest labor market statistics. Usually it’s bearish when the unemployment rate starts increasing year over year, but if it goes up because workers are coming off the sidelines, this cycle will be an exception. Average hourly earnings growth is at a cycle high and is not done accelerating because the slack in the labor market is running thin. The labor force is growing and the prime age labor force participation rate is increasing, showing us the labor market is strong. The overall labor force participation rate is stymied by demographics.

Rates Are Up, But The Consumer Is Healthy

The third group shows consumer confidence and borrowing growth. The only negative point about consumer sentiment is it’s manipulated by political bias. It’s still positive to see all readings extremely high. They have been correlated with year over year retail sales growth. Both revolving and non-revolving credit growth are positive and at healthy levels. This reinforces the point that the consumer’s balance sheet is healthy.