Consumption, the biggest component of US GDP, looks fragile


GDP is the value measure of total production (finished goods and services) within a country over a specified period.

It is calculated as: GDP = C+I+G+NX
I = Investment
G =Government Expenditure
NX = Net Exports

In this article we concentrate on the C component which makes up close to 70% of US GDP. We will examine five indicators to assess the health of US consumption.

Total Vehicle Sales

The manufacture of cars serves as a hub for economic activity. When car sales are high then industries related to car manufacturing feel the benefit too. This indicator helps give a general macroeconomic view. Cars are big ticket purchases and make up a major part of household expenses, generally financed by debt. The more positive a household is about the future, the greater the chances of making big ticket purchases.


Vehicles sales are an indicator of sentiment. If they fall off it will indicate that sentiment is negative and this may be a precursor to economic weakness.

The period from the end of 2010 to mid-2016 shows a robust expansion in the series accompanied with good momentum (blue rectangle). The series fell heavily into the lockdown period but has recovered. The current RSI for total vehicle sales is on the bullish side of 50 (green rectangle), but very close to the line. If it maintains above 50, total vehicle sales will have positive momentum behind it, but being so close to the line connotes fragility. Higher interest rates will be acting as a headwind here.

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Chain Store Sales

The Johnson Redbook Index is a measure of the year-over-year growth in same-store sales, weighted by sales volume, for a selection of major general retailers in the United States. The sample encompasses approximately 9,000 stores. The index accounts for more than 80% of the retail sales series officially reported by the US Department of Commerce in terms of dollar value. The data is also timely with the report released every Tuesday.

A benefit of a major general retailer index is that it yields data on a national level as opposed to regional data.


The Redbook index reached a peak in December 2021 (blue vertical). It declined thereafter and in August 2022 its RSI flipped to the bearish side of 50. Chain stores are weak which suggests that there is pressure on the consumption component of GDP.

Consumer Sentiment

Consumer sentiment gauges the general feeling of the consumer. The idea is that when consumers feel good, they will spend more. The University of Michigan conducts a monthly survey called the Michigan Consumer Sentiment Index, which measures consumer confidence levels in the United States. This survey is conducted via telephone interviews, where consumers are asked about their expectations for the economy.


According to the University of Michigan, consumer sentiment was generally good between April 2009 to October 2019. During this period its RSI was mostly on the bullish side of 50 (blue rectangle). However, it turned negative from Feb 2020 as the covid pandemic spread. Since then, the series has generally been negative (red rectangle) with a short burst of RSI positivity in 2021.

However, the series turned up in July 2022 and the RSI turned positive in February 2023 (green ellipse). This is positive but the series needs to be watched carefully as there is an element of volatility to it. Shocks to the economy e.g., sharp increases in oil prices may impact negatively on it. Given consumption's contribution to GDP, the longer the RSI maintains on the bullish side of 50, the better.

Existing Home Sales

The data on existing home sales transactions tracks and discloses the selling prices of pre-owned single-family houses, condominiums, and cooperatives across the United States. The data also includes the median price of a home. Price increases positively affect homeowners' wealth and feed into sentiment. I.e., as people feel better, they tend to spend more. Likewise, a decline in the series will affect sentiment negatively and spending is likely to decrease. In addition, if homes are bought it will feed into other industries e.g., new furniture and appliances.


Existing home sales turned down in October 2020 (blue vertical), and its RSI crossed to the bearish side of 50 in February 2022 (red vertical). The momentum is still negative, but the series has kicked up since January 2023 (green vertical). Home sales are vital in terms of driving the economy forward. If the RSI remains under 50, there will likely be a macroeconomic pressure, presumably due to the higher interest rate acting as a headwind. If the RSI moves to the bullish side of 50, it will be a boost to economic sentiment and consumption.


Underemployment refers to people working part-time because they cannot find full-time work. Unemployment usually lags economic downturns because mangers will generally cut down on working hours before firing an employee. This makes tracking part-time employment for economic reasons a very useful indicator.


The RSI for part-time for economic reasons remains below 50. This is generally good as it implies that people can find full-time work. However, the RSI is approaching 50. If it crosses above and holds it will suggest that there is a momentum favouring part-time employment for economic reasons. So, while it remains subdued for now there is an element of fragility associated with the series.


Given the size of its contribution to GDP, monitoring the health of consumption is important. By and large there are worrying signs. Total vehicle sales and underemployment are showing fragility in terms of their momentum and chain store sales are negative. The existing homes sales series has bounced somewhat but is yet to pass the threshold implying an underlying positive momentum. Consumer sentiment has turned positive but there is a volatile element to this series. Higher rates are acting as a headwind and there is a risk that consumption deteriorates unless we see stability in the above five indicators.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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