US consumer confidence grows but economic risks remain http://www.ft.com/intl/cms/s/0/502f82a0-521a-11e5-b029-b9d50a74fd14.html#axzz3o8QgorXh ©Jeff Kowalsky/Bloomberg Mustang alley: sports cars on the production line in Michigan High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email email@example.com to buy additional rights. http://www.ft.com/cms/s/0/502f82a0-521a-11e5-b029-b9d50a74fd14.html#ixzz3oBAXf6ww August was a tumultuous month in global equity markets but the stock price swings did not dent Americans’ rediscovered appetite for new cars. Sales were the strongest in a decade, with drivers flocking to purchase sports utility vehicles and pick-up trucks. Bumper sales were one sign of an increasingly robust US consumer and are a reason why, despite repeated false starts by the Federal Reserve, there is still a chance that it will raise short-term interest rates this year. High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email firstname.lastname@example.org to buy additional rights. http://www.ft.com/cms/s/0/502f82a0-521a-11e5-b029-b9d50a74fd14.html#ixzz3oBAeYGiM China faces a sharp economic slowdown, Brazil’s economy is in a dramatic decline and the European Central Bank has been signalling it is ready to add stimulus. At the other end of the spectrum stands the US economy, which has to date been bucking the global trend. “Consumer conditions are continuing to improve, the labour market is improving steadily, confidence is improving in step with that,” says Emily Kolinski Morris, chief economist at Ford Motor Company. “The prospects for final demand look pretty solid — the decline in energy prices is helpful for consumers. Vehicle sales have been quite robust. We are seeing improvement in transaction prices which is another sign of the health of the consumer.” US car sales, on course to top 17m units this year for the first time since before the recession, are a traditional bellwether of the economic health of US consumers, who are increasing overall inflation-adjusted spending at a year-on-year rate of more than 3 per cent. Falling oil prices, ultra-low interest rates and hiring that has been running at nearly 200,000 a month this year are helping drive the expansion. The question is when, after six years of steady if unspectacular growth, that consumer-driven rebound will hit a roadblock. The risks are multi-faceted and, as the Fed said in its September meeting, many stem from overseas. Principal among these are the 15 per cent surge in the US dollar against a basket of currencies, which is curbing exports, and the risk that volatile markets unsettle households and businesses. Coupled with this is the danger that a more significant downturn in emerging markets will circle the world and hit the US economy. It is a threat the Federal Reserve takes seriously, even if its chair, Janet Yellen, made it clear in a speech in late September that she does not expect overseas factors to derail the recovery in the US. Tom Porcelli, an economist at RBC Capital Markets, says that while US manufacturing shows signs of faltering in the face of weak overseas demand, the non-manufacturing sector, which accounts for the bulk of output, is faring far better. “We expect the domestic side of the US economy to continue to provide a considerable offset to any worsening conditions abroad,” he says. While the US is outshining many overseas partners, some economists are starting to fret that risks are quietly brewing at home. One sign of trouble is the remorselessly low rate of inflation, which could be evidence of underlying weaknesses in the economy. Another, which is often cited by former US Treasury Secretary Larry Summers, is that the Fed could end up short-circuiting the recovery with a rate hike when the economy is too weak to merit the rise. A further worry is that imbalances are starting to well up because of ultra-low interest rates and that this may lead to a significant economic setback. Some analysts are raising warning flags because values have surpassed boom-era peaks in the commercial property market. John Williams, the president of the Federal Reserve Bank of San Francisco, pointed to the residential housing market in a speech in late September. He said his “alert system” had been tripped by rising values in the real estate sector. The house price-to-rent ratio was where it was in 2003, he observed, a time the property market was heading into an ultimately disastrous boom. “One lesson I have taken from past episodes is that, once the imbalances have grown large, the options to deal with them are limited,” he said. “I think back to the mid-2000s, when we faced the question of whether the Fed should raise rates and risk pricking the bubble or let things run full steam ahead and deal with the consequences later.” The discussion highlights the complexity of the decision facing the Fed. Persistently sub-target inflation in the US is making it harder to argue the case for higher interest rates, as are the risks overseas. Yet judging by matters such as US households’ resurgent spending, the US economy is arguably overdue a rate rise. The Fed’s decision will have consequences that reverberate the world over.