Consumer spending in the U.S. is expected to remain strong during the holiday season thanks to positive employment conditions and a recent acceleration in wage growth, Moody’s Investors Service said in a new report out Monday.
However, as interest rates rise and other costs increase, Moody’s expects consumption to grow at a slower pace in 2019. In addition, if there is a reversal in the recent strong business profit growth that curtails job creation and wage increases, or a sharp financial market correction dampens sentiment, the consumption outlook would weaken, the report said.
Moody’s upgraded its outlook for the U.S. apparel and footwear sector to positive from stable earlier this month thanks to higher-than-expected earnings across the companies it tracks. Moody’s said earnings growth following two challenging years is accelerating beyond the rating agency’s previous expectations and is expected to remain robust over the next year to 18 months.
“Rising employment and an extended period of low interest rates have spurred 35 consecutive quarters of consumption growth, a longer record than most previous cycles,” Moody’s managing director Atsi Sheth said. “However, income gains have been unevenly distributed and interest rates are now rising, so for some households buying and borrowing conditions are turning less favorable, even as overall sentiment remains robust.”
Consumer spending should remain strong during the rest of the fourth quarter, Moody’s contended. Consumption increased in excess of 3 percent in the third quarter, marking the 35th consecutive quarter of growth and coming in higher than the annual average of 2.3 percent since 2010, as the country exited recession.
Real personal consumption expenditures for clothing and footwear fell $2.62 billion in September, to $402.94 billion–a 0.6 percent drop from August, according to the Bureau of Economic Analysis.
The slower pace of consumption expected next year is due to reduced spending capacity of many households. Moody’s said while household finances are generally healthy, there is variation by debt type and income level. For lower-income households, consumption growth may soon peak and even begin to decelerate as interest and other costs rise more than income growth.
“Consumer debt balances keep rising, but income and asset value growth coupled with low servicing costs have curbed leverage ratios,” the report noted. “Household balance sheet strength varies by income level, which could be reflected in delinquency data in the future.”
A weakened consumer financial position could expose sectors like retail and durable goods in the coming months. In retail, improvements in operating performance is expected to continue in 2019, with Moody’s predicting U.S. retail industry operating income growing 5 percent to 6 percent and sales growth at 4.5 percent to 5.5 percent.