August 22, 2013

What keeps the US consumer going?

Consumer spending keeps rising, and shares of consumer-oriented companies have been rising in price more than the general market. Why?

In the bad years of 2008 to 2009, now receding from memory, consumer spending spiraled downward but then quickly recovered and sustained itself. Thus, it might be good to look at the role of US consumers in the expansion and generally in recessions.

Since 2009, when the US emerged from the last recession, consumer spending has been rising steadily at an annual rate of about 5%. Spending has been rising in real terms (after allowing for inflation) as well. This has happened despite dire predictions of consumer pullbacks and retrenchments and much higher savings rates.

It’s important to understand the role of US consumers, collectively the biggest buying block on the planet and ultimately the expression of final demand. They are needed for economic growth in the United States and abroad. They are key for jobs and are necessary for federal and local governments to pay off their tax bills. Most important, consumers make up 70% of the US economy.

So what is helping US consumers defy the downward pull of gravity?

  1. Consumption is historically steadier than the rest of the economy. The role of US consumers in business cycles is not constant, but over time they are a stabilizing force. Consumers don’t trigger recessions. Rather, recessions historically are triggered more by decreased spending by businesses on big-ticket items and by higher interest rates. Consumers are the leftover effect, reducing their spending after jobs have been cut and work hours reduced. Consumers are a much steadier element in the role of economic cycles than many other factors.
  2. Work week: hours not jobs. Since the last recession, the number of new jobs has not been robust, compared to other cycles, so the ongoing buying power of consumers is coming not from new jobs, but from companies working their labor force more hours. US consumers spend most of what they make, and more hours put in means more pay.
  3. Wealth effects. After taking a beating in 2008 to 2009, US consumer wealth is now at new record highs. The rise of the stock market over the last four years has boosted wealth, and the gradual rise in house prices has increased the wealth of American consumers.
  4. Less cash going to pay off debt. US consumers are borrowing less than during other cycles. Their debt burden has been reduced for a number of reasons. Interest rates have fallen, and lower principal-and-interest costs have freed up more cash for the average household.
  5. Income skewing. The top 10% of US income earners makes up almost 40% of retail and general consumption in the country. This group has been gaining in its share of the national income, which has helped support its growing spending power, boosting overall spending.
  6. Imports from abroad are cheaper. Less expensive imports have freed up buying power.
  7. Affordability: There have been gains in productivity, and the last recession led to a drop in the price of many big-ticket items. Cars are now affordable in terms of disposable income, and houses are relatively cheap. All of this helps buying power.
  8. Gasoline prices at the pump have been contained, and in real terms they have fallen over the past few years. This allows more spending elsewhere.
For all of these reasons, US consumers have been a stabilizing and growing element of the business cycle. This explains why the stocks of consumer-oriented companies, especially consumer discretionary companies, have risen faster than the stock market as a whole. All that is needed now is more growth in consumer spending outside the United States to help broaden the picture and push the cycle forward.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.


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