MONTHLY MARKET MUSINGS

October 2023

The Engine Of The U.S. Economy

The U.S. consumer accounts for approximately 70% of U.S. GDP, they are what moves the economy. Looking into the recent commentary following this past earnings season, one might be inclined to think that a very weak U.S. consumer is unavoidable. While some slowing in spending is likely, the economic data suggests that a sharp drop in U.S. consumer spending is not a certainty.

A Snapshot Of The U.S. Consumer:

Looking at real consumer spending we can see that it has continued to improve relative to last year and is still trending above its pre-COVID levels[1]. While most economists are expecting this to slow in the coming months as the moratorium for U.S. student loan repayments is lifted, it should still progress at a relatively reasonable pace and as it stands there is no compelling reason to think that it would not be fall in line with historical trends.

The labour market has been another cited reason for expected consumer weakness as job growth slows and companies attempt to lower expenses in the face of a potentially more challenging economic environment. So far, the labour market has shown resilience and remains strong. Job growth will, however, likely continue to decelerate over time from the recent strong levels as the power dynamic shifts back to the employers and job vacancies are filled. This does not mean that the labour market won’t continue to gain ground overall though.

Household balance sheets are still healthy with net worth-to-disposable personal income ratios still near all-time highs[2]. That said, real disposable income growth has slowed in the past few months but if the underlying strength of the job market and the positive trends in real wages continue to improve then it is fair to assume that a steep drop-off in spending relative to historical levels is unlikely.

Another argument advocating for a drop-off in consumer spending is that the excess savings accumulated during the pandemic are essentially depleted and that consumers will need to resort to debt to maintain the equivalent level of spending or reduce that level altogether. Excess savings, the amount saved that is above the regularly attributed personal savings rate, accounts for a small portion of total wealth and likely does not play as much of a factor as it is being made out to be. Much of the pent-up demand stemming from the pandemic has been met and it is unlikely that two years after everything has re-opened will someone suddenly get an urge to dip into their savings to spend because they could not in 2020. Further, lower-income households who may have had a financial cushion at the onset of the re-opening have more than likely burnt through that awhile back so the claim that the squeeze on them will stifle consumer spending seems dubious. There is also a record amount of cash in money market and cash-equivalent securities[3] with investors having shifted to less liquid products over the past year to take advantage of higher yields. The personal savings rate in the U.S. is at similar levels to that of last year and should trend higher back towards normalized levels over the next year or so. As it stands, debt levels in the U.S. also seem reasonable. U.S. credit card delinquencies have risen from trough levels in 2021[4] but remain below historical averages and household debt service payments as a percent of disposable personal income remains low by historical standards[5].

All things considered, with the expectations of positive growth in real wages, a fairly strong labour market and continued healthy household balance sheets, the U.S. consumer still seems to be on reasonably solid footing. That said, a deceleration in spending from comparatively high levels is not out of the question nor is a shift in spending habits from goods to services or vice versa as we saw following the re-opening after COVID. In general, given the importance the U.S. consumer plays in the overall economy, a confident and healthy consumer should equate to strength in the economy and that should allow equity markets to continue to trend higher. Moreover, lower inflation and potential rate cuts beginning in mid-2024 should provide some relief of the current pressures often cited as the reasons for a massive slowdown in spending. Equities remain our vehicle of choice given the reasoning above and also due to the expectation that with a better-than-expected economy we should see inflows from the large cash stockpile in money market fund assets, which currently sits at nearly US$6 trillion[6], as high yields become less available and the risk-on trade becomes prominent in a healthier market environment.

JAY SMITH, CIM, FCSI

Senior Portfolio Manager & Senior Wealth Advisor          
 

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor