U.S. consumer spending
The below graph reflects the recovery on US Consumer spending post-2008 crisis, as well as a loss of momentum over the past year. Additionally, while total levels of consumption (blue line) appear to reflect strong, ongoing growth in terms of total consumption, the yellow and red lines reflect an ongoing decline in nominal consumption growth rates.
U.S. consumer spending has recovered from the 2008 credit crisis. While optimists point to this recovery as indisputable evidence that the U.S. economy is the most resilient and dynamic in the world, this reasoning may not fully recognize a variety of risk factors that could undermine the American consumer’s ability to continue to spend at current levels. As the above graph shows, consumer spending in the United States has recovered from the 2008 crisis, supported by unprecedented government spending and record-low interest rates. However, as government spending and associated budget deficits shrink and rates begin to rise, consumer spending appears to be losing momentum.
One poll (Gallop) tracks the weekly expenditures of Americans—excluding home, motor vehicle, and normal household bills. This spending might reflect more discretionary spending above and beyond basic or core household expenses. Beginning in 2008, this amount was at $119. Post-2008 crisis, this amount fell to $53, though it had recovered to $90 by the beginning of 2013, and has reached $104 as of August 11, 2013. Economists attribute the improvement in spending to an increase in housing prices, as well as the ongoing benefit of low mortgage interest rates. Refinanced mortgages have simply meant that the average homeowner has likely increased his or her level of disposable income. However, as the above graph illustrates, spending appears to be losing momentum, and it could potentially decline should the nascent, government-led U.S. economic recovery also lose steam.
The University of Michigan Consumer Confidence Index slipped to 80.00 on Friday, August 16—falling from last month’s six-year high of 85.1. Economists attribute this decline to the recent upward movement in interest rates, which has cooled future expectations of gains in housing prices. Consumers may have become more reluctant to spend in light of higher interest rates, which have accompanied the U.S. Federal Reserve Bank (Fed) signal that it may begin to taper is quantitative easing policy. The U.S. Fed currently purchases $85 billion of U.S. Treasuries and mortgage-backed securities, though it has signaled that it may taper these purchases by the end of the year and possibly end them by the middle of 2014.
Monthly housing starts had plunged from over 2,000,000 in 2008 to nearly 500,000 by 2009. Housing starts recovered to approximately 1,000,000 by April 2013, though they’ve since fallen to the 850,000-to-900,000 level. Economists point out that the recent increase in interest rates that have accompanied the Fed tapering signal has cooled the housing market, and that this impact has just begun to show up in the broader economic data—such as consumer spending and consumer confidence. Many mortgages are still in excess of property values. So as expectations for future gains in housing prices cool, so does spending.
A pullback in U.S. equities? As a result of higher interest rates and softer economic data, U.S. equity markets have experienced a modest pullback, with the Dow Jones falling from 15,300 to 14,700 when the Fed signaled in June, and again from 15,600 to 15,000 in August. The Fed’s preparations for a possible withdrawal of liquidity from treasuries and mortgage-backed securities have caused some turbulence in equities markets, though equities prices seem to have remained fairly well behaved. The Chicago Board of Options Exchange Volatility Index (VIX), a measure of the annualized volatility of the S&P500 Stock Index, rose from 12% to 20% during the June sell-off, and recently rose from the 12% to the 15% level in August. These recent sell-offs and increases in market volatility have been very modest relative to the 80% volatility level seen during the 2008 crisis, so the Fed’s tapering threat hasn’t been too disruptive just yet.
Will 2013 see a shift from growth to value stocks?
Post-2008 recovery, growth shares have modestly outperformed value shares, as reflected in the iShares Russell 1000 Growth Index (IWF) outperforming the iShares Russell 1000 Value Index (IWD) by nearly 15%. However, as the equity markets have begun to rally in 2013, Growth ETF (IWF) has lagged Value ETF (IWD) by about 6%, as well as the broader S&P (SPY)(IVV) index by approximately 3%. This could reflect a shift away from more richly valued growth companies, such as Apple (at 3.72%, the largest holding of IWF) to more value-priced shares such as Exxon (at 4.79%, largest holding of IWD). As consumers become more conservative, it’s possible that investment behavior could reflect less chasing of growth, which could slow, and a greater appreciation of less aggressively priced firms with stable and more defensive earnings, to include consumer staples such as Johnson & Johnson at 2.80% of IWD, and pharmaceuticals such as Pfizer, Inc. at 2.25% of IWD.