Evangelina Guerra, 10, picks a pair of uniform shorts inside an Old Navy clothing shop during a "ChildSpree" back-to-school shopping event in San Jose, August 3, 2013.Stephen Lam/Reuters
As the U.S. Government shutdown approaches its third week, some businesses have been feeling the crunch. One market watcher, however, is focused on something else: the effect of the crisis on the purchasing power of the U.S. consumer.
The cumulative effect of the shutdown on the economy is expected to be modest, with the consensus being a loss of one-tenth of 1 per cent of GDP per week. And the markets rose Friday as investors and traders awaited the possibility of a reprieve from the stalemate in Washington.
The recovery is still fragile. U.S. consumers are just getting back on their feet, and businesses have been reluctant to spend, even though they have a lot of cash on hand. And the longer the conditions persist, the more they could weigh on business confidence. That in turn will act as a brake on hiring and investment, which ultimately hurts the U.S. consumer. According to Russ Koesterich, U.S.-based chief investment strategist for BlackRock Inc., the structural issues affecting consumers are being exacerbated by the political dysfunction.
"There's this mythological belief the U.S. consumer will always come roaring back, but there are some longer term headwinds [they are] facing," Mr. Koesterich said in an interview on a recent trip to Toronto.
Jobs growth in the U.S. is one such obstacle for consumers. Employers hired fewer people in August, and the jobless rate dropped as people gave up the hunt for work, according to the the Labor Department's most recent figures.
For those who are working, there are further strains on their budgets. Much like Canadians, the U.S. consumer has a lot of debt. Mr. Koesterich points out that the middle classes are also facing stagnant real income growth. "No one outside the top 10 per cent can get a raise."
As as more jobs are outsourced to countries where labour is cheaper, or lost to technological improvements, income growth is unlikely to match the last 50 years. "And for an economy driven two-thirds by consumption, that's a big headwind," he said.
What about the housing and stock market recoveries? It's true that U.S. house prices have been rising, with home values up 12.4 per cent int the one year to July 2013, according to Standard & Poor's Case/Shiller home price index, and the S&P 500 is up 19 per cent so far this year. But those developments have mostly benefited higher income consumers, Mr. Koesterich reasoned.
"I certainly think in a situation where the economy is not as robust," he added, political disputes "which can undermine confidence take on a greater importance."