Higher consumption fuels economic growth, so there are several implications for the economy and markets if consumers spend less. Among them: more modest growth, low-for-long interest rates and a household sector that comprises a relatively smaller percentage of the economy than it did at the peak in 2007.
Market Realist – Implications for the economy and markets if consumption remains low.
The above graph shows household consumption as a percentage of GDP (gross domestic product) for several major economies. The United States has the highest dependence on consumption within the developed world (EFA).
Consumption makes up ~69% of US GDP. It makes up 64.4% and 61.1%, respectively, of the United Kingdom’s and Japan’s (EWJ) GDP. Germany (EWG) and China (FXI) are the least dependent on consumption within major economies shown in the graph.
Low consumption is thus bad news for the US economy. A modest growth rate could be the new normal for the United States. This would translate into muted returns for equities (VTI).
Modest growth could mean Treasury (TLT) yields might stay low, as the Fed could leave interest rates low to encourage consumption.
Wage growth could pick up, as evidenced by the increase in wage rates by companies such as Wal-Mart (WMT), Target (TGT), and McDonald’s (MCD). But it will not compensate the slump in debt that has fueled consumption for decades.
Muted consumption could eventually lead to higher net exports, corporate investment, and government spending as a percentage of the GDP.
In the next part of this series, we’ll find out which sectors are likely to underperform and which ones you could probably shift to in this backdrop.