One of the bright spots of the U.S. economy has been consumer spending. That will continue to be the case, as the consumer spending outlook for the next couple of years is solid, premised on continuing strength in a number of areas: real disposable income growth, further gains in auto sales, increasing household real estate wealth, elevated levels of consumer confidence, modest consumer price inflation, and a housing market that is gaining traction. However, there are still several headwinds, such as mounting student loan debt, weak wage growth, slower population growth, and a stock market correction.
IHS forecasts real gross domestic product (GDP) growth of 2.4 percent in 2016 (the same as in 2015) and 2.8 percent in 2017. GDP growth depends to a significant extent on consumer spending, which in nominal terms determines approximately 68 percent of U.S. GDP. Real consumer spending growth is likely to increase by 2.9 percent in 2016 and 3.1 percent in 2017. This may seem disappointing after the 3.1 percent increase in 2015, but it is clearly outpacing the 2.7 percent rate seen in 2014. In fact, consumer spending is providing the largest contribution to real GDP growth since 2005.
The outlook for real disposable income growth also is positive; our forecasts currently are standing at 3.2 percent for 2016 and 3.1 percent in 2017, following a 3.5 percent rise in 2015. All of these are significantly above 2014's reading of 2.7 percent.
The decline in gasoline prices has produced a windfall for consumers. Weekly gas prices (U.S. Department of Energy all grades) fell by US $1.82 per gallon between the first week of July 2014, when gas averaged $3.75 per gallon, and February 1 of this year, when the average price was $1.93 per gallon. In 2015, Americans spent on average $750 per household less on motor fuel than in 2014, and we expect them to spend $380 per household less at the pump in 2016 than they did in 2015.
What else will the economy bring for consumers over the coming year? Here are some additional forecasts:
Consumers will remain somewhat cautious. Looking ahead, the positives clearly outweigh the negatives on the consumer front for 2016. However, while consumer spending is a relatively strong sector of the economy, consumers have not thrown all caution to the wind and will not start spending indiscriminately. Many households are using the "pump-price dividend" from lower gasoline prices to pay down debt, put a little extra money in the bank, and perhaps dine out. Indeed, the personal saving rate in the fourth quarter of 2015 was the highest since the fourth quarter of 2012, and it is projected to be even higher in the first quarter of 2016.
People will eat out more often. Increased levels of consumer confidence, higher levels of employment, lower gas prices, and wage gains surpassing consumer price increases have propelled a larger percentage of consumers' food spending into the "food away from home" category. In other words, restaurant sales are cannibalizing grocery store sales. This category represented 40 percent of total consumer spending on food in the first quarter of 2010 and reached 44.1 percent by the end of 2015. We expect that percentage to rise to around 45 percent by the end of 2016 (see Figure 1).
Auto sales growth will shift into a lower gear. Auto sales remain a bright spot but are less dependent on pent-up demand than in the early years of the recovery. Accordingly, even though the number of vehicles sold is on the rise, sales are growing at a slower pace. Light-vehicle sales will increase from 17.3 million units in 2015 to 17.8 million units in 2016, and are expected to reach a new high of 18.2 million units in 2017. Lower pump prices have helped boost new light trucks' share of total light-vehicle sales above that of new autos. New light trucks' share is likely to stabilize at around 57.5 percent of total light-vehicle sales for 2016 and 2017, up from 51 percent in the first half of 2013.
Consumer spending in other categories will rise modestly. Consumers shifted some of their spending away from autos and more toward apparel, recreational services, computers and software, food and beverages, and home furnishings in 2015. Looking ahead, this trend is likely to stabilize in 2016 and 2017 as consumers' attention cycles back toward purchasing new vehicles.
One of the most important factors influencing consumer spending is the housing market. The outlook is for housing starts to surpass a 1.3-million-unit annualized rate by the end of 2016. New home sales will follow, with new single-family home sales averaging 603,000 units in 2016, the highest level since 2007. Existing home sales are expected to improve modestly, to an average 5.3-million-unit annual rate in 2016. A housing market improvement has considerable impact on consumer spending on home furnishings and "white goods" such as dishwashers, dryers, and refrigerators.
Household income gains will broaden. In 2015, real median household income is expected to be 4.7 percent below its 2007 level. This is a considerable improvement over the readings in 2013 (8.0 percent below the 2007 level) and 2014 (6.5 percent below the 2007 level). Many middle-class families were forced into a lower standard of living during the Great Recession and the subsequent anemic recovery.
The poor performance of real median household income has caused a bifurcation in consumer spending patterns—discount stores are doing well and luxury stores are doing even better, while middle-tier retailers are having a hard time gaining traction. Because the bottom 50 percent of consumers are still struggling, "payroll-cycle economics"—the effect of consumers doing their shopping in the day or two after they are paid—has become increasingly important in this economy.
The good news on the household-income front is that income gains are starting to broaden. Most of the gains between 2008 and 2013 were among the top 5 percent of earners, but in 2014 that began to change; between 2008 and 2014, the top 20 percent saw the most significant income gains. As income gains broaden, the intensity of payroll-cycle economics lessens and consumer spending solidifies. Looking into the future, real median household income is expected to surpass its 2007 level in 2019 due to falling unemployment, modest consumer price inflation, and wage gains outpacing inflation.
Retail: Some will win, some will lose. For all of 2016, we expect retail sales growth to manage a 3.4 percent rate, up from 2.1 percent in 2015. The major gainers in 2016 are likely to be restaurants, e-commerce merchants, building material and garden supply stores, sporting goods stores, and apparel stores. In 2015, there were sizable contractions in sales at gasoline stations, department stores, and office supply, jewelry, and electronics stores. Gasoline stations are likely to see a further decline in 2016 due to falling gasoline prices. Jewelry and electronics stores are expected to reverse course in the New Year, while office supply and department stores are on a structural decline and are losing considerable share to cyber-stores.
Clicks will continue to outpace the bricks in 2016. We expect e-commerce retail sales to represent 8.0 percent of retail trade (retail sales excluding restaurants) this year (see Figure 2). This is compared with 6.4 percent for 2014 and an estimated 7.3 percent for 2015. E-commerce retail sales should continue to grow at double-digit rates from now through 2022.