When the beer stops flowing, the global economy’s not growing
Consumer spend on beer, eating out and generally having fun is on the wane — which leads to no hiring, lower wages, and less to spend on beer...
Denver — If the global economy hits the skids, the warning may come from the hop-covered taproom of the Denver Beer Company, where yearly sales are up 17% and founder Charlie Berger says the new “Juicy Freak” India Pale Ale is a best-seller despite its $1-per-pint higher price tag.
Bars and restaurants have been mainstays of a US economic expansion that rests squarely on consumer spending, and if businesses such as Berger’s start to slow it’s a short step from there to jobs, wages, business sentiment and world demand.
“These were numbers we couldn’t believe,” Berger said of the growth in his main taproom sales and the 30% jump in output over the past year, to 20,000 barrels, at the company’s main production brewery.
If the view from this open-air bar remains rosy, it’s amid a decidedly mixed picture elsewhere in the US and the world as economists and policy makers take note of what has become a consumer-dependent — and potentially fragile — global growth picture.
In China, shopkeepers tell of waning demand that has made them more cautious, in some cases delaying personal purchases and amplifying the effect of that uncertainty
This week, the International Monetary Fund (IMF) downgraded its outlook for world growth in 2019 to 3%, the slowest pace since the global financial crisis more than a decade ago. Officials cited stalled trade and investment as the culprit, leaving household spending as the main support for private-sector growth.
That may itself be coming under pressure.
In China, shopkeepers tell of waning demand that has made them more cautious, in some cases delaying personal purchases and amplifying the effect of that uncertainty. Embroiled in a trade war with the US, China saw its economic growth slow to 6.2% in the second quarter on a year-on-year basis, its weakest pace in at least 27 years. Retail sales growth is the weakest since early 2003, and Chinese car sales declined last year for the first time since the 1990s.
“Our business has not been so good — fewer migrant workers are coming to our shop, so I might have to save up for another two years before I can buy a car,” said Luo Shuzhen, a shop owner in the southern city of Dongguan, who was hoping to buy this year.
It’s a decision that, magnified across China, is being felt in Germany, where automobile exports have slumped, and down the supply chain.
In Japan and Europe, any good news on household spending is clouded by an offset in the other direction. A Bank of Japan consumer index rose to its second-highest level on record in August, evidenced by strong sales of luxury cars as well as a shift to servings of higher-quality beef among the lunchtime restaurant crowd. But real wages fell for the eighth straight month in August, complicating the outlook for consumption that is likely to take a further hit from a hike in the sales tax this month to 10% from 8%.
German consumers seemed spurred by recent moves by the European Central Bank (ECB) to support the eurozone economy, and French consumers by recent tax relief. But there was some evidence British consumers may be starting to hunker down, shifting spending from restaurants and hotels to food to be consumed at home.
Not keeping on trucking
Consumption is always a major portion of GDP, accounting for roughly 70% of US output and roughly 60% in China, for example. But ideally it’s balanced with business investment and contributions from trade, elements that add not just to current growth but set the stage for future hiring and expansion.
As it stands, GDP for the 36 countries of the Organisation for Economic Co-operation and Development (OECD), which includes the US and much of Europe and accounts for the bulk of the global economy, would have shrunk in the second quarter of 2019 if not for a strong contribution from consumer spending.
Growth will depend on how that holds up in the face of slowing global trade volumes, and particularly how US consumers fare.
Employment in the trucking industry, for example, has flatlined this year, and when that ‘is starting to roll over, it is a cause for concern’
Some policy makers have already flagged a possible recession in the US manufacturing sector. Though US unemployment was near a 50-year low of 3.5% in September, job and wage growth both slowed. “The US consumer is really the pillar of not just the US economy but the global economy. If that pillar starts to weaken then all bets are off,” said Gregory Daco, chief US economist with Oxford Economics.
Weakness may be expected to show up early in bar and restaurant sales, he said. As of July, growth in spending at “food services and drinking places” hit its slowest pace in two and a half years, and has declined for three months running.
It might seem a narrow issue but “you get from point A to point B in that if people spend less, the restaurants have less revenue, hire fewer people, be careful with wage growth, and that will feed back into lower spending, then broaden to other sectors,” be it consumer durables such as cars or appliances, or business spending on new equipment or software, Daco said.
Bart Watson, chief economist for the Brewers Association, a US coalition of more than 5,000 small producers, said it is difficult to disentangle an overall drop in beer production with a steady shift to higher-end beverages produced by companies such as Denver Beer. But within an overall draft in draught keg production of about 8%, there is also “some sign of on-premise weakness” among the taprooms that have been central to that part of the industry’s success, Watson said. “We have to take a wait-and-see” approach on what it means.”
With record numbers of people working and wages still growing, the immediate future may be okay, keeping Berger’s beer company and the rest of the US consumer complex on track.
However, Thomas Costerg, senior US economist at Pictet Wealth Management, noted that some of his preferred warning signs were flashing. Employment in the trucking industry, for example, has flatlined this year, and when that “is starting to roll over, it is a cause for concern. That is a cyclical part of the economy that is starting to erode”.
Trucking has also been a dependable source of middle-wage jobs during the recovery. It may be no coincidence that US employment growth in bars and restaurants, up roughly 33% since the end of the 2007-2009 recession, has also crawled to a stop.
“I think we are in the last innings of the consumer cycle,” Costerg said. “Consumer spending may be strong for two or three quarters, but I am worried there could be a cliff effect” if business spending and investment does not pick up.