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The strength of the US consumer

29 Feb 2016

Fuelled by ongoing, strong consumer spending and residential construction, the US will lead the global economy in 2016. 

Given the mediocre path of expansion in the eurozone and Japan, and concern about a slowdown in China and other developing nations, the US appears as a beam of light in the global growth outlook for 2016.

Behind Macquarie Research's 2.4 per cent growth forecast for the world’s largest economy in 2016 lies the strength of the American consumer, whose purchases make up 70 per cent of gross domestic product. 

Despite recent softness in industrial related indicators, 2016 should be another year where the US will lead the global economy and be a source of strength, underpinned by consumer spending, residential investment and services.

The tripling in value of the US equity market since 2009 has seen below-average investor participation, according to various analyses. There has also been speculation. 

The economic recovery and gains in stocks have been fuelled by unprecedented monetary stimulus, a policy that will face testing times in 2016 after the US Federal Reserve in December increased the key interest rate for the first time since 2006.

"The US economy is stronger than popularly perceived," says Macquarie Securities North American Economist David Doyle. 

"Despite recent softness in industrial related indicators, 2016 should be another year where the US will lead the global economy and be a source of strength, underpinned by consumer spending, residential investment and services."

Multi-year highs in spending

It would be difficult to overestimate the current power of Americans’ spending habits. 

Over the past four quarters, real personal consumption has contributed more to GDP growth than it did on average between 2002-2007.

The duo found that spending has risen by more tha $US500 billion over the past year and is supported by some of the best fundamentals in over a decade.

To gauge how sustainable this is, Doyle and colleague Brendan Livingstone looked at 10 unconventional indicators of economic strength. 

Their findings show investment and consumption in different fields has reached multi-year highs, with the pace of growth accelerating in many cases. The results point to growth that is, if anything, picking up rather than decelerating. 

Spending has risen by more than $US500 billion over the past year and is "supported by some of the best fundamentals in over a decade," they found. 

Some of the findings that led to this conclusion were:

  • private investment growth in research and development is at the highest level since 2008
  • nominal investment in manufacturing has more than doubled since 2012
  • Americans are increasingly travelling domestically and abroad
  • spending in restaurants grew at its fastest pace in more than a decade last year
  • over the past two years, a net 3.5 million workers with bachelor degrees or higher have entered the labour force
  • in services, the net share of firms reporting difficulty in hiring is nearly triple the average from 2005-7, according to a survey by the Society for Human Resource Management (SHRM)
  • A rising share of HR executives are reporting increasing compensation for new hires with current levels well above the average from 2005-2007, the SHRM survey showed
  • the number of consumers who expect to be better off in 12 months has climbed to the highest since 2007, according to the University of Michigan’s survey of consumer sentiment.

Consumer is king

 “The consumer is king,"says Doyle, adding that investors can gain exposure to this sector through several companies. 

Around 70 per cent of personal consumption is in services within the US, an area that has grown at close to five per cent in the past year led by travel, health care, and restaurant spending.

An analysis of demographic trends by Macquarie Research suggests that the momentum is likely to persist, with expected growth in insurance, health care, personal services and entertainment spending.

Expenditure on goods, however, adds up to less than a third of total consumption, and about a fifth of it if staple items such as food and energy are excluded. 

Clothing and apparel accounts for only three per cent of spending, and this volatile sub-sector has seen some disappointingly high stock inventories.

More growth yet

Several drivers behind the US expansion, including residential investment and construction employment, are yet to accelerate.

Doyle says this gives him confidence that there won’t be an economic recession in the near future and that strength is unlikely to be derailed by the US Federal Reserve’s commencement of an interest-rate hiking cycle. 

"Many indicators tell us there is still further room for the cycle to run,"he explains. 

"The expansion has been shallow and gradual, and people have by and large been disappointed in it. But it is structurally resilient, it is persistent, and it is likely to continue."

For more information on the reports “Top Ten: It’s better than you think” (15 October 2015) and “King Consumer: Yes Virginia, spending is still strong” (17 November 2015) contact Macquarie Research.

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