Gross Domestic Product (GDP) is a measure of all goods and services produced in the economy. The most common method of determining a nation’s GDP involves totalling all consumer spending, business spending/investment, government spending and net exports (exports less imports).
The U.S. consumer has been the major force behind the strong economic growth in America since WWII. Consumer spending has accounted for almost 70% of GDP growth in the U.S. for the last half century. Even through difficult economic periods, U.S. consumer spending has been amazingly resilient.
This appears to be changing. Battered by soaring fuel, food and health care costs, falling employment, falling house values
and turmoil in the financial markets the U.S. middle class is being squeezed. In June U.S. consumer confidence plunged to its lowest level in 28 years. According to a recent survey undertaken by the Pew Research Center and the Gallup Organization, a majority of adults in the United States say that their incomes have stagnated or fallen backwards over the past five years. This is the most downbeat assessment of personal progress in nearly half a century of polling by these organizations. The level of gloom also varies widely by age with baby-boomers (aged 43-62) more pessimistic than either the young or the elderly.
Middle class Americans are gloomy with good reason. Real (inflation adjusted) median annual household income in the U.S. (arguably the best single measure of middle class standard of living) remains below 1999 levels. This has been one of the longest slumps for this key indicator in modern history. Until 2007 the U.S. middle class accepted this income stagnation because the real estate bubble meant the value of their main asset (housing) was on an upward trajectory. This story is over. Declining home values have also reduced or eliminated access of many middle class Americans to consumption-driven equity loans and credit lines.
With the end of the 25 year credit boom in the U.S. (briefly interrupted in 1990), it is conceivable that this contraction in consumer spending may represent the end of an era. Shopped out and severely under-saved (see chart below), U.S. middle class baby-boomers appear to be confronting a secular change in consumer behaviour to ready themselves for retirement.
This scenario also implies that future GDP growth in the U.S. must rely on sectors in the economy other than consumer spending. Interestingly, this “economic re-balancing” appears to be already occurring. For the last three quarters, U.S. GDP growth can almost entirely be attributed to net exports. Aided by a weak U.S. dollar, surging exports have served as a lifeline for the soft U.S. economy.
A secular change in U.S. consumer spending would also have a marked impact on any future investment strategy. Investors must be very selective when investing in companies dependent on the U.S. consumer. Alternatively, U.S. manufacturers that export to higher growth developing countries could represent sound investment opportunities.
Disclaimer: This information is not intended to be comprehensive investment, tax or legal advice applicable to the individual circumstances of a potential investor and should not be considered as personal investment advice, an offer, or solicitation to buy and/or sell investment products. Every effort has been made to ensure accurate information has been provided at the time of publication, however accuracy cannot be guaranteed. Interest rates, market conditions, tax rules and other factors change frequently and past investment performance does not guarantee future results. The manager accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein. Please consult an investment manager prior to making any investment decisions.