By Howard Schneider
WASHINGTON (Reuters) -The U.S. consumer’s durability as a prop for the economy may be tested in coming weeks as family budgets, particularly among the less affluent, are stressed by rising healthcare costs, the potential loss of federal food benefits, and a wobbly job market outlook that is already taking a toll on earnings.
November is typically the start of a buoyant shopping and travel season, with the Thanksgiving holiday at the end of the month and Christmas following in late December.
This year it also coincides with the possible loss of food benefits for many families amid an ongoing U.S. government shutdown, and rising healthcare costs for others if federal subsidies are cut at the start of the year for insurance policies offered under the Affordable Care Act, also known as Obamacare.
Add in the lost spending by hundreds of thousands of furloughed federal workers, a raft of layoff announcements from top companies, rising prices, and a recent drop in consumer confidence, and the staying power of U.S. shoppers may be tried.
“The American economy is a $30 trillion dynamic and resilient beast, but it’s going to face a test here at the turn of the year,” said Joseph Brusuelas, chief economist at RSM US, with “adverse policy shocks emanating from Washington and the change in behavior among corporates who hoarded labor for the past four to five years. … That was never an indefinite behavior. We’re going to see migration up in the unemployment rate.”
The coming shocks to household budgets will take place against a backdrop of still-low unemployment and consumer spending that, at least as of August, was growing at a 2.7% annual rate, slower than last year but still expanding.
For now, however, policymakers at the Federal Reserve and elsewhere will lack updated government reports to understand how the economy is adapting at a critical moment, with the shutdown not only turning off benefits but also the flow of data.
Funding for benefits under the Supplemental Nutrition Assistance Program for nearly 42 million low-income people, nearly 12% of the U.S. population, was due to run out on November 1 because of the shutdown, which is now in its second month.
A federal judge in Rhode Island, however, ruled on Friday the suspension of the benefits was illegal, and it was unclear if some of them would be paid this month.
The loss of SNAP benefits, also known as food stamps, would “impose significant hardship on many households, but the impact on overall consumers’ spending and GDP probably will be relatively small,” at about $100 billion a year, said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. However, that is “just one channel through which the shutdown will weigh on activity this quarter.”
In their absence, at least a dozen states have plans to fill some of the food benefits gap, but the amounts involved are a fraction of what the program provides each month, and some large states including Texas and Florida have not announced any effort to step in.
FED POLICYMAKERS SEE EVIDENCE OF ‘K-SHAPED’ ECONOMY
Economists don’t necessarily see the economy tipping into recession as a result of the growing pressures on consumers, though Brusuelas estimated the shutdown may lower growth for the fourth quarter by a full percentage point, to as low as 1%.
Just as the current shutdown may hit household budgets ahead of a peak shopping season, offsetting forces, including tax cuts and exemptions for things like overtime pay and tipped income, will boost many household refunds next year.
“In the first quarter of the year, we are going to see substantial tax refunds for working Americans,” Treasury Secretary Scott Bessent told Fox Business Network recently, something that will also allow some taxpayers to withhold less and keep more of their weekly paychecks.
How that all nets out, however, remains to be determined and will be closely watched by Fed policymakers trying to understand whether the economy slows and unemployment rises or whether it will accelerate as firms and households finish adjusting to trade, immigration and other policy changes during the first year of President Donald Trump’s second term in the White House.
Fed Chair Jerome Powell, speaking to reporters after the central bank cut interest rates by a quarter of a percentage point last week, noted how consumer spending “has defied a lot of negative forecasts” and helped sustain economic growth.
But he also noted, as have other Fed policymakers, the current “bifurcated” pattern – sometimes called the “K-shaped economy” – of higher-income families riding stock market gains and spending freely on travel, high-end goods, and restaurant meals, contrasted with signs of stress, including rising auto loan defaults and intense bargain shopping in the rest of the country.
“There is so much anecdotal information on that, we think there is something there,” Powell said.
Meanwhile, announced rounds of layoffs by Amazon.com, UPS and others “could absolutely have implications for job creation” that some economists already consider at a standstill, Powell added.
The question for the Fed is whether the good times at the higher “spur” of the K remain enough, in aggregate, to offset weakness elsewhere.
The headwinds are about to get stiffer.
Besides the threat to the SNAP payments, household budgets could be dealt another blow from higher premiums for health insurance purchased under the ACA. The expiration next year of tax credits to underwrite those policies is a core issue in the budget stand-off between Trump, whose tax bill earlier this year slashed ACA subsidies, and Democrats in Congress who want them maintained.
The Kaiser Family Foundation estimated the loss of tax credits will cost the more than 20 million people insured through the ACA more than $1,000 a year each on average, and potentially more.
Research from the JPMorganChase Institute points to another risk. Analysis of its in-house database of account holders showed inflation-adjusted income growth among those aged 25 to 54, a key consumer demographic, had slipped from around 3% annually to 2%, on par with the sluggish rate after the 2007-2009 financial crisis and recession.
Heading into the coming holidays, there is reason to worry about the consumer, Yardeni Research economists said. Along with all the other headwinds, recent surveys show people are planning to spend less during the Christmas shopping season, and, in addition, there will be fewer people spending because of recent deportations of migrants and tighter immigration enforcement.
“There will literally be fewer people shopping in the U.S. this holiday (season), and those who are say they’ll be spending less this season,” said Jackie Doherty, a Yardeni contributing editor.
(Reporting by Howard Schneider; Additional reporting by Ann Saphir; Editing by Dan Burns and Paul Simao)
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