Lumpy and cold-sensitive, the U.S. economy lurches forward

April 30, 2014

The U.S. economy is still a bit “lumpy,” wobbly in parts, and definitely sensitive to cold.

But the signs are strong that the nation is on a path toward more sustainable growth, according to the analysts and business leaders on the Milken Institute Global Conference panel U.S. Overview: Can the U.S. Engine Pull the Global Growth Train?

“Last year was one shock to the system after another,” said Walmart U.S. CEO Bill Simon. Sequestration. Government shutdown. Cuts to EBT and SNAP (food stamps). American consumers showed remarkable resilience through all that, he said. “We’re starting to see some encouraging consumer patterns. It’s very lumpy. It’s geographically lumpy, and the middle [class] and down is still challenged with household income.”

Lumpy and cold sensitive

A particularly big shock was the brutally cold winter, which depressed retail spending across the Eastern Seaboard and Midwest. Yet good signs are emerging in unlikely places—such as the jewelry counter.

There’s an important distinction to be made between consumer needs and wants, explained Sarah Quinlan, senior vice president for market insights at MasterCard Advisors, the MasterCard unit that consults on trends related to consumer spending. So when she sees jewelry sales tick upward, she knows that American consumers have some discretionary dollars. Likewise, more spending on air travel and restaurants are good signs, given that around 70 percent of GDP comes from consumer spending.

Strengthening that spending isn’t just about a bit of extra cash—it can also be encouraged by expanding access to credit and other consumer tools. With shopping shifting to online and mobile, more consumers need credit (or debit) cards and Internet connections simply to participate in this sector of the economy.

Increasing such middle-class purchases—even if they are small—is the ballast that will keep the economy stable. The much-discussed 1 percent can’t drive America’s consumer economy by itself. The spending of this group is “wobbly”—it rises and drops steeply, Quinlan said, typically alongside rises and dips in the stock market.

Manufacturing goods closer to these consumers is also becoming more feasible—and desirable—as energy costs in the U.S. have dropped. That’s also good news for job growth.

“The two areas that we really see growing are anything that is energy-intensive because we have lower energy costs, and those are going be around for a long time,” said Eric Spiegel, president and CEO of Siemens USA, which has 130 manufacturing sites here. “And secondly, advanced manufacturing. If you go back 10 or 15 years, everyone said we were going to be a service economy. But what they didn’t understand was that when you take manufacturing offshore, the R&D often follows it and then we lost our innovation edge in many different areas. You’re seeing that come back because the U.S. is a great place to marry manufacturing and R&D.”

Jim Moffatt, chairman and CEO of Deloitte Consulting LLP, said that more of these large companies need to get their cash off the sidelines and invest in their own growth. “Uncertainty has become the new ‘abnormal,’ ” he said. “Companies have to get used to the fact that there is such uncertainty. The risk of doing nothing is greater than the risk of investing in change.”