Buy and Hold?

What’s going on with consumers?

Photo: Tim Gouw. Source: Picography

Personal consumption is incredibly important. We’re constantly told that consumers make up more than 2/3rds of our economy, although that probably overstates the case. Medical expenses, for example, are considered part of consumer demand, even though the government pays for about half of our health care.

Still, it’s important to understand what consumers are doing. The stock market almost never suffers a significant decline except during a recession, and it’s hard to have a recession unless consumers are pulling back. So what are consumers doing? A couple of researchers at the Federal Reserve Banks of Cleveland and Boston looked at retail sales county-by-county for the past fifteen years. What they learned is fascinating.

Retail Sales, County data, Year-over-year. Source: Boston Fed, Moody Analytics

First, all consumption is local. Even during the dot-com and housing bust, purchases in some counties grew by over 20%. Conversely, during the housing boom, consumption shrank in some places by the same amount. Second, the current “tepid” recovery is actually stronger than the housing boom. Not only are median expenditures higher, but the areas that are worst off are still doing about twice as well as a decade ago. Finally, consumption doesn’t happen in a vacuum. When they tried to create a mathematical model to explain consumer behavior, they had to include unemployment, income, and debt in their equations. This both highlights and limits how market observers should look at economic data. The Labor Department’s monthly employment report is pivotal. But analysts need to look at other factors, too.

Retail Sales excluding Autos and Gasoline, Year-over-year. Source: Census Department

At present, consumers appear to be pretty healthy: incomes are growing, debt burdens are modest, and unemployment is falling. The stock market has been volatile, but that seems to relate to concerns about corporate profits, the strength of the dollar, and lower oil and commodities prices.

It’s ironic that for an economy to be healthy, people need to spend more. But my expense is someone else’s income—we’re all linked in an intricate, multi-level financial matrix that’s constantly shifting. The more we understand our connections, the better we can adjust our plans. In the long run, we’re all planners.

Douglas R. Tengdin, CFA

Chief Investment Officer

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