The one segment of the U.S. economy that still appears to be lagging is also the biggest: household consumption.
In May, personal spending again disappointed, up just 0.2%, versus expectations for a 0.4% increase. Meanwhile, according to revised first-quarter gross domestic product (GDP) numbers released last week, personal consumption rose just 1%, down from the previous estimate of 3.1% growth.
Looking forward, household consumption – as distinguished from business spending, which I believe will accelerate – most likely won’t pick- up significantly anytime soon. As I write in my new weekly commentary, there are three reasons why personal spending is likely to remain muted in the foreseeable future.
Debt is no longer fueling consumption. Consumers are still struggling to pay down their debts and credit availability is limited. Debt helped power consumption for four consecutive decades and, without it, consumers have relatively shallow pockets.
Lower savings aren’t spurring spending. The savings rate appears to have stabilized at around 4%. While consumers could theoretically spend more by savings less, at this level, the savings rate probably won’t go down much more.
Income growth remains very weak. Most households are not experiencing much, if any, growth in real income. After inflation, disposable income is up just 1.9% year-over-year, roughly 1.5 percentage points below the long-term average. Unless wages accelerate or consumers decide to dip further into already meager savings, spending is likely to remain subdued.
So, though there have been recent encouraging signs about economic growth, including better-than-expected home sales figures, slower consumer spending is likely to continue to drag down U.S. economic growth.
What does this mean for investors? Two implications were visible last week, when mixed economic data pushed both interest rates and the dollar lower. Until the economy demonstrates more consistent growth, yields are likely to remain low.
In addition, there is a third implication: continued weakness in consumer-related stocks, particularly discretionary companies. Despite what is shaping up to be a decent year for U.S. stocks overall, consumer discretionary companies continue to lag.
As such, I continue to advocate caution toward consumer-related segments of the market. You can read more about my sector outlooks in my latest Investment Directions monthly market commentary.
Sources: BlackRock, Bloomberg