Monthly Market Commentary
The State of the U.S. Consumer
Philip Blancato, Chief Market Strategist, Advisor Group
Accounting for about 70% of economic output, the United States economy is tied to the health of the consumer and consumer spending. After a lackluster third quarter of GDP growth driven by a slowdown in consumer spending, we feel that gauging the health of the U.S. consumer can provide insights into the path of the U.S. economy and ultimately financial markets moving forward.
A key component of consumer strength is the health of the labor market, in that the greater the proportion of the population that is employed, the greater the consumption power that population has. The labor market has come a long way from the depths of the 2020 spike in unemployment brought on by Coronavirus. Since March of 2020, the labor market has added close to 16 million jobs, from 23.1 million unemployed to about 7.4 million today. There is still a long way to go, as the employment level has not returned to its pre-pandemic levels, but it is safe to say that the jobs recovery is well underway. Job openings are also plentiful, as the Job Openings and Labor Turnover Survey (JOLTS) reported 10 million job openings during the month of October. There is clearly an imbalance between the number of available workers and the number of available jobs; those who wish to return to the labor force are doing so at a time when demand for labor is high.
Consumer sentiment can be an important indicator of future economic activity and consumer behavior. Looking back over the last year, it would appear that some of the most important drivers of recent sentiment have improved; the labor market is improving, unemployment is coming down, the stock market has made a remarkable recovery from its lows in 2020, and a majority of the U.S. population has been vaccinated. Despite those improvements, The University of Michigan Consumer Sentiment index fell to a 10-year low in November as Americans continue to be concerned over the impact of rising prices.
Inflation hit its highest annual rate in over three decades in October, as the CPI increased 0.9% during the month, and 6.2% year-over-year. Though inflation weighs heavily on consumers ability to purchase goods and services, wage growth can counteract some of these price increases. In October, wages climbed 0.4%, and are up 4.9% year-overyear, only slightly behind the pace of price increases. Secondarily, this pickup in inflation is coming at a time when borrowing costs are historically low, which theoretically should help borrowers. For contrast, the last time the CPI was above 6% was in late 1990, when the Fed Funds rate was above 7%. The difference now is that consumers are effectively borrowing at negative real rates; for example, every payment you make on your mortgage is being paid with dollars that aren’t worth as much, at the same time the home that you are borrowing to own is likely appreciating, as the average sales price of houses sold in the United States hit record highs this month.
Retail sales increased at a 1.7% rate in October, beating the expected gain of 1.4%, and are up 16.3% from a year ago. This pickup in retail sales is especially important after a weak third quarter that was hurt by the Delta variant and product shortages. Gains in October were led by non-store (online) retailers and electronics, as consumers got a head-start on holiday spending due to expected delays in delivery. Holiday spending is expected to remain a tailwind for retail sales over the fourth quarter.
While persistent inflation and the ongoing impact of the Coronavirus are headwinds that will influence consumer behavior moving forward, heading into the end of 2021 it appears that the consumer remains strong. A steadily improving labor market, strong wage growth, and a willingness and ability to continue spending point to improvements in the fourth quarter. With that in mind, we think it still makes sense to maintain an overweight to risk-assets in portfolios, as this economy still has room to run in the coming years.
Job Openings – JOLTS: This concept tracks the number of specific job openings in an economy. Job vacancies generally include either newly created or unoccupied positions (or those that are about to become vacant) where an employer is taking specific actions to fill these positions.
CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.
The Federal Reserve System: The central bank of the United States. It performs several general functions to promote the effective operation of the U.S. economy and, more generally, the public interest.
Nonfarm Payrolls: This indicator measures the number of employees on business payrolls. It is also sometimes referred to as establishment survey employment to distinguish it from the household survey measure of employment.
Unemployment Rate: The unemployment rate tracks the number of unemployed persons as a percentage of the labor force (the total number of employed plus unemployed). These figures generally come from a household labor force survey.
University of Michigan Consumer Sentiment Index: Consumer confidence tracks sentiment among households or consumers. The results are based on surveys conducted among a random sample of households. Target Audience: representative sample of US households (excluding Alaska and Hawaii). Surveys of Consumers collects data on consumer attitudes and expectations summarized in the Consumer Sentiment, in order to determine the changes in consumers’ willingness to buy and to predict their subsequent discretionary expenditures. This Index is comprised of measures of attitudes toward personal finances, general business conditions, and market conditions or prices. Components of the Index of Consumer Sentiment are included in the Leading Indicator Composite Index. Unit: Index (Q1 1966=100)
Retail Sales: Retail sales (also referred to as retail trade) tracks the resale of new and used goods to the general public, for personal or household consumption. This concept is based on the value of goods sold.
Average Hourly Earnings (Wage Growth): This concept tracks total hourly remuneration (in cash or in kind) paid to employees in return for work done (or paid leave).
GDP: Gross domestic product (GDP) measures the final market value of all goods and services produced within a country. It is the most frequently used indicator of economic activity. The GDP by expenditure approach measures total final expenditures (at purchasers’ prices), including exports less imports. This concept is adjusted for inflation.
Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance cannot guarantee future results.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect again loss. In general, the bond market is volatile; bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds or high-yield bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.
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1 Chart: Bloomberg as of (11/18/2021)