UBS On-Air: Paul Donovan Daily Audio 'The great US consumer'
UBS Chief Economist Paul Donovan argues the US labor market remains the critical driver of the economy, with consumers spending more and saving less to afford tariffs per the full note . He sees the labor market as strong enough to sustain confidence but not strong enough to create wage pressures, dismissing wage-price spirals as unrealistic. Oil price rises are a near-term inflation perception risk, but the broader narrative supports steady consumer spending, which benefits risk assets.
What the desk is arguing
Paul Donovan argues that the US labor market is the linchpin of the economy, as consumers in 2025 relied on higher spending and lower savings to absorb tariff costs per the full note . Job security is essential to maintain that consumption, and the current labor market provides it without generating significant wage increases.
Donovan explicitly rejects the possibility of a 1970s-style wage-price spiral, noting that average hourly earnings data can be misleading when hiring of cheaper younger workers slows. Instead, the labor market conditions support steady spending, which is the key engine for growth.
The alternative read would be that weakening labor market data—such as a rise in claims or a drop in payrolls—could quickly undermine consumer confidence. However, Donovan emphasizes the prevailing data does not support that scenario.
Where it sits in our coverage
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How other firms see it
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What the calendar says
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Key takeaways
- 01US labor market is strong enough to support consumer spending but not to create wage pressures.
- 02Consumers are spending more and saving less to afford tariffs, requiring job security.
- 03Oil price rises could temporarily inflate perceptions, but the underlying inflation trend remains benign.
- 04Wage-price spiral risk is dismissed as very low, with current labor structures unlike the 1970s.
Market implications
Watch USD/JPY and EUR/USD for risk-on support as consumer confidence holds. A payrolls print above 200K today would reinforce the view, while a surprise miss could trigger a dollar selloff.
Risks to this view
A sharp drop in nonfarm payrolls (below 100K) or a spike in jobless claims would invalidate the thesis, potentially triggering a defensive shift into safe havens. Additionally, a sustained oil price surge above $80/barrel could dent consumer confidence and spending.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time, on Friday the 6th of March. It's US Employment Report Friday.
The state of the labour market is still the most important factor for the US economy and for the time being it is probably still the most potential serious medium-term risk to growth. In 2025 US consumers relied on spending a larger share of their income and saving a smaller share of their income in order to pay for the tariffs. US tariffs are changing but probably not in a way that US consumers will notice.
Price levels are unlikely to come down and that's what matters. That means maintaining the confidence to keep on spending is important and the labour market is a key part of that. The labour market in the States is certainly not strong enough to create significant wage increases and the labour market structures are nothing like those of the 1970s.
Wage price spirals seem entirely unrealistic. Remember average hourly earnings are not wages and in a no hire no fire situation where cheaper younger workers are struggling to be hired the average earnings may rise without anyone getting paid any more. However the labour market in the States does appear strong enough to give people who have jobs the security to continue spending.
The rise in the oil price is something that is going to affect inflation perceptions. The daily gasoline price chart in the States seems to have an almost vertical line over the course of the past week although we have had episodes like this in the past and the latest price data is just matching the price highs of last year. However more is expected by way of price increase in the immediate future.
People will complain and feel that their living standards are suffering and that is a political consideration. US President Trump does seem to be focused on trying to lower oil prices but having seemingly be surprised by the recent oil price increase the US administration has yet to offer markets a policy response that investors find convincing. The question is whether this gasoline price change will change economic behaviour.
For now the answer seems likely to be no. A prolonged episode of higher prices would further erode savings and potentially also raise concerns about employment but for the time being consumers are likely to maintain consumption. It takes a very considerable force for a US consumer to choose to cut consumption.
This then brings us to the release of US January retail sales data. This is of course prior to recent events but it gives a sense of where the consumer started the year and of course if the consumer complains about the cost of filling the family floors of sports utility vehicles but doesn't actually change their behaviour in the face of short term oil price increases this foundation of consumer spending from January is likely to be a fairly reasonable guide to spending in the near term future. Auto sales are expected to be a bit of a drag on the headline figures but the ex-auto and ex-gasoline number is forecast to come in at more or less a trend like rate of growth.
It is worth noting that the consensus is not very good at forecasting this figure. In fact it's more than a bit useless but surprises in the data are therefore the norm. Europe offers very little by way of alternative to the drama of the US figures.
There's fourth quarter euro area GDP data but this is so overshadowed by the earlier release of national numbers as to be almost entirely irrelevant to the financial markets. That's all for today. Have a good day.
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