Is The Consumer Showing Weakness?

The Observatory

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of the economy and financial markets in real-time. The insights provided here are slivers of our research process that are integrated algorithmically into our systems to create rules-based portfolios.

Consumer spending is a function of wages and the propensity to spend those wages. Wages are, in turn, driven by labor markets. We trace this causal chain to understand current consumer conditions. Our assessment is as follows:

• The labor market remains expanding, with early indications of a slowing.

• Stable labor markets continue to support strong real income growth.

• In line with labor and income conditions, consumer spending remains positive and broad-based.

We share the data driving this assessment. We begin with labor markets. The labor market is dominant in driving variation in overall economic activity. While business cycle pressures may originate in other areas of the economy, the labor market is the ultimate transmission mechanism for cyclical conditions to aggregate spending and income. Below, we visualize how employment growth explains most of the variance of GDP in a time-varying manner. Notably, during expansions, employment sets the baseline trend for GDP growth, while during recessions, job losses explain almost all of the contraction in activity:

Labor markets broadly remain positive. However, we see some indications of cyclical weakness in the form of