“YOLO,” Danielle Walker said, explaining why she had just spent a chunk of her biweekly $900 paycheck on an adorable outfit — quilted navy vest, cranberry plaid riding pants and knit sweater — from the “equestrian shop” at Janie and Jack, the children’s clothing store in the Mall of America where she works.
“You only live once” also appears to be the motto of many of her customers. “It seems like people are looser with their spending,” said Walker, 25, who lives in nearby Apple Valley, Minnesota, and has a 5-year-old daughter. “It’s just amazing how impulsive they are, but then I realize I do it.”
American consumers are energetically engaged in a spend-a-thon. American businesses, by contrast, are not.
Nathan Jeppson, chief of Northwest Hardwoods, a major manufacturer of hardwood lumber, is definitely not in a YOLO mood. He recently canceled a $1.75 million order to buy 19 forklifts for his sawmills and dry-kiln yards.
“We can’t justify that spend without certainty,” said Jeppson, who has watched from his office in Tacoma, as sales and profits plummeted because of continuing trade discord between the United States and China. “So we’ll go into salvage-and-repair mode till there is.”
His company has also shelved plans for millions of dollars in other equipment purchases and investments. “We cut 80% of the capital budget that we anticipated spending,” he said. In addition, 100 of the 1,600-member workforce were laid off; another 125 had their hours reduced.
Businesses and households swim in the same economic soup, and their outlooks — gloomy or bright — are usually in sync. But in recent months, the two seem to occupy opposite ends of a teeter-totter, with consumers continuing to spend while business owners and managers are chastened by doubt and uncertainty.
This curious divergence has allowed the economic expansion to extend its record run. The question is how long it can continue.
“They will catch up with each other,” said Richard Curtin, director of consumer surveys at the University of Michigan. When they do, if consumers are in the lead and businesses respond in kind, the economy will keep growing. If business anxiety spreads to households, the risk of a recession looms.
Among chief executives, persistent trade frictions, worldwide economic weakness and reports of labor shortages are sowing disquiet. A year ago, buoyed by tax cuts and deregulation, company leaders talked about high “animal spirits” to convey the frothy exhilaration that was coursing through their offices.
Now their confidence is at recession-level lows, according to The Conference Board, a nonprofit research group. Investment in equipment, software, research and structures fell by 3% in September, the Commerce Department reported Wednesday, the second monthly reduction in a row.
Consumers have mostly held tight to their optimism. Confidence has dipped slightly in recent months, but their economic outlook remains elevated. Personal spending rose at a 2.9% annual rate in the third quarter, after increasing at a 4.6% rate in the previous three months.
Consumers are responsible for 70% of the country’s economic activity. And at a moment when business investment is shrinking, their spending is pretty much the only thing driving the nation’s growth — an observation that the Federal Reserve chairman, Jerome Powell, made Wednesday after announcing that the central bank would trim benchmark interest rates to keep the economy from a downhill slide.
To some extent, the mismatch between consumer and business confidence is akin to the parable of the blind men and the elephant: Their descriptions vary wildly because each is touching a different part: the trunk, a tusk or a side.
“They’re responding to different aspects of the economy,” Curtin said. Households are looking at how their family, friends and neighbors are doing, the low unemployment rate and the small, but real increase in incomes.
Other news is largely ignored. In the October consumer survey, one in four respondents brought up the negative effect of tariffs. Just 2% mentioned the impeachment inquiry into President Donald Trump.
At the Mall of America, Charles Barr was feeling flush from his promotion to general manager at Popeye’s and the $200-a-week raise that came with it. Seated outside the restaurant, which overlooks a snaking orange roller coaster, Barr said he splurged on two purchases this year: a used GMC Acadia for $30,000 and a 70-inch television for $900 from Best Buy. “A man is measured by the size of his television,” he said, laughing.
Business managers and executives tend to focus on a wider landscape. Nearly two-thirds of chief executives surveyed by The Conference Board in September talked about the troubling and lasting fallout from the trade war.
“We definitely have a cautious eye on what’s going on,” said Adam Briggs, vice president for sales and marketing at Trans-Matic Manufacturing, a metal stamper in Holland, Michigan, that employs 275 people. He mentioned tariffs, slowing manufacturing and persistent uncertainty.
“We’re definitely taking the same steps as more companies are right now and scrutinizing capital investment,” Briggs said. While “2020 is not going to be 2009,” he added, “most people believe the economy is not going to grow and may shrink a little bit.”
But business and consumer outlooks can diverge for only so long, economists say. They are part of the same feedback loop.
Businesses that are wary, like Trans-Matic and Northwest Woods, pull back on spending, hiring and pay increases. Those moves can push up the unemployment rate, hold down wages and worry consumers, who in turn become more cautious about spending. And that further undermines business confidence, which … well, you get the idea.
The cycle, of course, can just as easily run the other way. Enthusiastic consumer spending pushes businesses to produce more goods and services, encouraging managers to invest more money, compete for workers and increase wages, which bolsters consumer confidence.
The disparity in confidence levels is already much smaller in places where local conditions match the broader economy, like states with large manufacturing centers that have declined, Curtin of the University of Michigan noted.
In his view, consumers are the primary engine. “Consumer spending is pretty robust, and businesses need to spend and expand to accommodate that demand,” he said. Business investment has fallen since mid-2018, he said, and “still consumers are carrying the economy.”
Nicholas Bloom, an economics professor at Stanford University, disagrees. A co-director of the research panel responsible for the Survey of Business Uncertainty for the Federal Reserve Bank of Atlanta, Bloom sees business in the lead.
“Business is more forward-looking,” he said. “We’re at the end of a very long expansion, and there are now a number of politically driven headwinds: Trump’s trade fight with China, Brexit and Europe’s slowdown. It’s the last song of the night.”
He described consumers as more backward-looking. The average person tends to notice the very low unemployment rate and reports of stock market rallies, he said, which create a sense of good times.
The shopping spirit was on display a few days ago at Nordstrom’s new seven-story crystalline palace in New York City. The women’s shoe department was so busy that customers had to take a number, as if shopping at a meat counter for chuck roast instead of for Jimmy Choo’s.
Sales are sure to heat up further as the holidays approach, regardless of whether consumers flip through store racks or stay on the couch. Radial, which fulfills orders for retail brands like Cole Haan and Rag & Bone, plans to add 21,000 temporary workers to handle the rush.
“E-commerce continues to grow,” said Tim Hinckley, Radial’s chief commercial officer. “No matter what happens, we see an optimistic outlook.”