Consumer Demand Poised to Boost Recovery

NEW YORK CITY—Although he wrote last week that “the jury is still out” on whether the US economy is entering a period of stronger growth, Cushman & Wakefield's Ken McCarthy sees a number of factors related to consumer demand that are gathering momentum. McCarthy, New York City-based senior managing director, economic analysis and forecasting at C&W, says in a US Economic Update released on Wednesday that “we are already starting to see a rebound in growth from the severe winter.”

Two key sectors McCarthy sees as contributors to growth in 2014 are the auto and housing industries. “Both are expected to grow strongly as consumer confidence rises and pent-up demand, i.e. consumption deferred during this recovery, is realized,” he writes.

Pent-up demand has been a mainstay of consumer attitudes for some time now. “During the recession and sluggish recovery, consumers have been reluctant to replace durable goods like appliances and autos unless necessary,” says McCarthy. “This postponing of purchases can only go on for so long before replacement is required. The combination of a severe recession and subpar recovery has held back consumer demand and resulted in a significant build up in pent-up demand that is now becoming 'actual' demand, which will accelerate in the coming year.”

In the first quarter of the year, McCarthy says, consumer spending on durable goods was 4.4% higher than a year earlier, “not particularly strong. Throughout this recovery, spending on durables has grown at a solid pace, but has not spiked as it frequently has in previous recoveries. This suggests that there is still a healthy amount of pent-up demand” latent in the economy.

Auto sales, for instance, have risen strongly, but have yet to reach the levels we saw in the early 2000s, “indicating that there is still some upside,” says McCarthy. “The average age of a car on the road was 11.4 years in 2013—an all-time high. As hiring accelerates, we expect more of this pent-up demand to provide an extra push to consumption for several quarters.”

As for sales of new homes, McCarthy notes that these were up 36% above the trough in Q1 while existing home sales were up 18%. “This growth will bring with it more consumer spending on a variety of other goods and services including appliances, furniture, utilities and financial services,” he predicts. “As home sales have increased, so have prices with the Case-Shiller home price index currently up 23% since early 2012. Higher home prices are improving confidence levels as homeowners feel wealthier.”

That's reflected in the general trend of the Conference Board's monthly Consumer Confidence Index, which rose to 83 in May after declining to 81.7 in April. The board's Present Situation index rose to 80.4 from 78.5, while the Expectations Index increased more gradually to 84.8 from 83.9 in April. The gap between the two indices, this month and last, indicates that consumers are more optimistic about the future than the present, dovetailing with McCarthy's prediction that this year and 2015 “should be the best of the current expansion.”

Comments Lynn Franco, director of economic indicators at the Conference Board, also headquartered here, “Consumer confidence improved slightly in May, as consumers assessed current conditions, in particular the labor market, more favorably. Expectations regarding the short-term outlook for the economy, jobs, and personal finances were also more upbeat. In fact, the percentage of consumers expecting their incomes to grow over the next six months is the highest since December 2007” at 20.2%. Thus, Franco sums up, “despite last month's decline, consumers' confidence appears to be growing.”