Savannah Chamber

8 2 very historically low mortgage rates, which will discourage refinancing activity. Nonetheless, consumers will be more willing to take on home equity debt. The proportion homeowners who extract cash from the refinancing of their home mortgages will rise. Credit card debt will expand as lenders continue to persuade people who have lower credit scores, so credit card default rates will rise. One reason why consumer spending will grow is that household finances have improved. As people shifted their priorities from spending to savings, the savings rate rose to 5.7 percent in 2016. Due to both the strong labor market and high levels of consumer confidence, the savings rate declined to 4.6 percent in 2017 and is poised to decline to about 3.6 percent in 2018. Thus, changes in the savings rate will be a tailwind to consumer spending and in turn to U.S. GDP growth in 2018. However, over the long term, many households will find that level of savings will not be adequate to maintain current living standards in retirement, especially if returns on financial assets remain below historical norms. The household savings rate therefore needs to rise to 7 or 8 percent. The restoration of the discipline of saving represents an overdue return to normalcy that helped households unwind imbalances that developed in their balance sheets. For example, the household financial obligation ratio was over 250 basis points lower in 2017 than it was in late 2007. In fact, the 2017 household financial obligation ratio is lower than the levels that prevailed in the early 1990s. The lower financial obligation—or debt service—ratio not only frees up spending and inspires confidence, but it also allows households to more easily service their debt. This protracted period of household deleveraging was painful, but it was also necessary. The statistics show that deleveraging is over. In 2015-2017, households slowly increased leverage and they will continue to do so in 2018. One concern is that extreme volatility in the financial markets may cause jittery consumers to push up the household savings rate very sharply, which would precipitate a recession. In 2018, turmoil in the U.S. stock market could lower consumer confidence and/or reduce financial equity wealth, but real estate wealth should continue to increase modestly. This is important to the outlook because real estate wealth tends to have a larger influence on overall consumer spending than equity- based wealth. Changes in equity-based wealth have a significant influence on spending for luxury items and on spending by retirees, however. Uncertainty about the federal government's healthcare policy is another factor that may restrain consumer spending. Now, job creation—and the income growth that accompanies it—is vital to the outlook for both consumer spending and the overall economy. The forecast anticipates that job growth will be adequate to support 2.5 percent GDP growth, but not to raise the rate of GDP growth to its long-term average of 2.9 percent. Growth in the number of jobs, the number of hours worked per job, and compensation will support this income growth. Low productivity growth will prevent wages from rising very rapidly, however. In addition, the labor force participation rate will rise slightly. Due to a decline in automobile sales, consumers' spending for durable goods will increase more slowly in 2018 than in 2017. Auto loan delinquencies are rising quickly, so lenders will tighten credit. Consequently, spending for durable goods will no longer increase significantly faster than spending for nondurable goods and services. More household formation and improving housing market conditions will power sales of furniture and durable household equipment. Outlays for information processing equipment will grow strongly. Due to higher oil prices as well as increased use, spending on nondurables such as gasoline and other energy goods will rise. Demographic factors will underpin spending on pharmaceuticals and other medical products. Higher commodity prices and population growth should prompt more spending on groceries, but intense competition among retailers for grocery items will limit sales growth due to margin compression. Due to

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