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US Consumers Are Looking Good
Thanks to low unemployment and rising household wealth, real consumer spending is on the rise. Because consumer spending makes up approximately two-thirds of the US economy, and personal consumption accounts for about 2% of GDP growth, a strong US consumer bodes well for the overall economy.
Tailwinds
The unemployment rate is still at a very low 4% as of June 30, and thanks to a soaring stock market and higher home prices, estimates place household net worth at nearly 51% higher than it was in its peak quarter before the financial crisis.
And
, while there will always be concern over consumer debt and there has been a lot of talk about student loan debt in particular, consumer balance sheets are actually in great shape. In aggregate, households have over $7 in assets for every $1 they have in debt. Most of that debt (67%) is tied to mortgages, and over 90% of those are fixed-rate mortgages. This is a vastly different scenario than we saw in 2006 and 2007. Student loans are the next largest liability category, but at 10% of consumer debt, it doesn't yet represent a threat to the larger economy.
Relatively low inflation also has increased many workers' purchasing power. Even with the frustratingly slow rise in wage growth, wage increases have still outstripped inflation.
Signs of Confidence
With household net worth on the rise, Americans are on firmer financial footing and therefore more comfortable spending a larger portion of their paychecks. The saving rate has fallen to around 3% of nominal income which implies that a larger share of income is now being spent instead.
US Consumer spending is in fact the highest it has ever been after reaching $12 trillion in the first quarter of 2018.
Less formal evidence of consumer optimism can be found by looking at the purchase patterns of vehicles - and specifically, recreational vehicles. RV's are highly discretionary purchases and during the recession, RV shipments plummeted as low as 166,000 units in 2009. This year, sales are projected to top 554,000.
Despite all the recent attention surrounding trade and politics, the US economy remains on solid footing, in large part, thanks to consumers. And, if we continue to see strong fundamentals like low unemployment, low inflation, and rising household wealth, the consumer should remain in great shape.
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Last week's light trading and volatility did not stop equities from rising during the holiday shortened week. Continuing the pattern of recent months, the technology-heavy Nasdaq and the smaller-cap benchmarks outperformed. Traders appeared to take a wait-and-see approach after the enactment of trade tariffs on Friday. Positive employment and service sector data pushed stocks to their best one-day gain in a month.
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> Employment:
On Friday, July 6, the Bureau of Labor Statistics released their latest employment data. A sharp increase in the number of unemployed actively looking for a job lifted the unemployment rate 2 tenths to 4.0% in June. The rise in the number of people looking for a job is good news, indicating that discouraged workers are more confident in their prospects. And importantly, this gives FOMC members some breathing room because it reduces wage pressures.
> Trade:
Given the constant media attention on tariffs and trade wars, we wanted to include an exhibit on our trade balance. The international trade balance has posted a deficit almost continuously since the 1980s. Trade deficits impact US GDP growth, but a smaller deficit adds to growth, while a larger deficit decreases GDP growth. As reference, China's trade surplus with the United States was $33.2 billion in May and $152.2 billion year-to-date, up 13.5% from the same period last year.
Last week's International Trade Balance report is positive for the economy showing strong demand for exports - which will be good for second-quarter GDP. It also underscores the strength of cross-border trade as we enter a period of reciprocal tariff actions.
> Late in the Cycle?:
The return of volatility and the sheer length of the US equity bull market has caused some investors to conclude we're in the late stages of the economic cycle. That may prove to be true, however, that does not mean one should abandon equities. The exhibit below shows that late-cycle returns tend to be substantial. The average return for the two years preceding a downturn is almost 45%; even for the six months preceding, the return averaged 14%. This suggests that exiting the market too early may leave considerable upside on the table.
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What better way to beat the summer heat than with a Slurpee at your local 7-11. America's oldest convenience store chain is giving away free Slurpees on Wednesday, July 11 (aka 7/11).
The iconic frozen drinks were introduced back in 1966 and have since become a major symbol for the massive chain of convenience stores. Wild Cherry and Coca-Cola have long been favorites, but fun flavors like
Skittles, Sour Patch Watermelon, Birthday Cake, and a spicy cinnamon flavor, called
Pepsi Fire, pop up now and then to keep things interesting.
The chain gives away around 9 million free Slurpees on July 11 each year, so while no purchase is required, be prepared for a line.
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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