Brave New (Consumer) World

The U.S. has the largest consumer sector in the world, with consumer spending representing almost 70% of gross domestic product (GDP). Consumer spending represents a wide range of purchases, including:

  • Durable goods, such as cars, furniture and large appliances
  • Goods that are used up quickly, such as food, clothing and fuel
  • Service-related items like financial services and insurance

Because the U.S. consumes a large share of what it produces, consumer spending is a key indicator of economic health. Beyond that, increases or decreases in consumer prices are a reflection of inflation levels, which can drive the timing and amount of future interest rate moves.

Improved outlook

As a sign of economic recovery and strength, the U.S. consumer has shown resiliency. In fact, the average consumer has actually improved in terms of savings and debt from before the crisis. Debt payments as a percent of income are below 10%, a ratio not witnessed since the early 1980s and 1990s. Debt levels are down also, hovering at approximately 14% of assets, similar to the early 1990s.  

However, these increased savings and decreased debt ratios may not have been a willing choice on part of the consumer; as the post-financial crisis credit markets were much tighter, resulting in consumers finding it more difficult to access credit. The net result was positive as debt levels shrank considerably.

Jobs data trending positively

Jobs data are also a powerful indicator of economic recovery and strength. After reaching a high of 10% during the height of the Great Recession, unemployment is now at a low of 4.3%, a figure that represents a close to full employment environment. This, too, encourages upward momentum in consumer confidence and future spending.

A changing consumer landscape

In the immediate post-recession environment, income was highly concentrated among top wage earners. We have seen some this recession-driven anomaly retreat in recent years, and the U.S. has experienced some dramatic demographic shifts, which we feel will positively impact the overall consumer outlook. As the recovery has progressed, those in lower income brackets have experienced growth in income. As a result, income has become more diffuse across wage levels, and total income has grown, both a boom for consumer spending.

Demographically, the youngest age cohort, 25 to 34 and the oldest, 55 and older, in the work force now make up about half of all workers and earn a similar share of total wages. While there are less baby boomers working, they earn more, while wage growth for millennials early in their career is greater. These factors balance the two groups out. Baby boomers are tending to work longer past traditional retirement age, but as they retire and the labor markets becomes even tighter, millennials are poised to benefit. Millennials are already spending more, now surpassing baby boomers in overall consumption. This trend is likely to continue and extend to larger ticket items as income levels grow for younger workers.

Similarly, there will be ripple effects across the economy as baby boomers grow older and retire. For example, the healthcare industry could continue to benefit from increased healthcare spending. Also, as individuals grow older their investment risk tolerance tends to change, resulting in a shift to less risky, and more income generating portfolios. As savings are drawn down and health care expenses grow, this could ultimately drive inflation up.

Shifts in retail behavior

Although retail sales have not recovered as quickly expected, given the improvement in employment figures and lower energy costs, one area that has been robust is auto sales, possibly because many opted to delay such a big purchase during the recession. Housing, a gauge of future wealth expectations, has lagged in the recovery, partially in relation to its prominent role in the financial crisis. As millennials age and begin families, we anticipate that housing purchases will pick up.

There has also been a general move to softer retail items, particularly services, travel and experiences. For retail items traditionally purchased at a physical brick and mortar location, however, the single biggest change is the ascendance of online sales. While some companies have been able to evolve, others have or could not. A conversation concerning retail cannot fail to mention Amazon, which has been the major beneficiary of the shift to online sales, largely by virtue of leading the way in revolutionizing the supply and distribution chain to provide ever increasing speed and variety. This move is likely to continue and potentially accelerate.

Favorable view for equities

Overall, our outlook for consumer confidence and for the markets, which historically have tracked together, is favorable with some caveats. Underlying fundamentals for corporate earnings appear stable, and growth in jobs, controlled inflation, rising wage income and the continued recovery in the housing market all help to spur consumption. On the down side of the spectrum is the potential for slower job growth, as the U.S. reaches near full employment. Millennials, possibly as a result of the recession or due to lingering student debt, are more reluctant to borrow, which could constrain housing purchases. Finally, for baby boomers, health care is likely to become a larger portion of their overall consumption. Overall, we are seeing stable economic growth, and we anticipate healthy GDP figure for the second quarter of the year. In this environment, we believe that equities can help deliver attractive risk/reward for long-term investors able to tolerate period of market volatility.

 

Important Legal Disclosures and Information

The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.


The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.

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