Consumption Growth Is on the Rise
With unemployment rates currently below 5%, households have more disposable income, so consumers now have more opportunities to increase consumption growth. During a 6 month period in 2015, consumption growth reached a rate of 4% rate, with real U.S. GDP growing alongside it.
With oil prices having fallen roughly 50% between 2014-2015, spending on gas has significantly decreased. Consequently, around $100 billion in disposable income has been freed up for spending in the consumer discretionary sector. With 9 in 10 consumers saying they enjoy going to restaurants, a portion of that newly freed discretionary income will likely go to eating out.
Market Realist – Consumption growth is on the rise.
The above graph shows the unemployment rate year-over-year (or YoY), wage growth, and oil prices, which are factors that determine disposable income. Unemployment rates in the United States have declined drastically since the beginning of the decade. The economy has produced more than 8 million jobs in the last three years.
Between September 2011 and June 2015, wage growth averaged a meager 2%. However, over the past 12 months, wage growth has averaged 2.5%.
Meanwhile, oil (USO) prices have plunged from ~$110 per barrel in mid-2014 to ~$50 per barrel this year. Lower gasoline prices mean people spend less at the pump, which leaves them with more money to spend elsewhere or to save.
All these factors have helped increase the disposable income of households. Since 1Q14, YoY growth in consumer spending has averaged a solid 3.9%.
This has benefited the consumer discretionary (XLY) sector, which has been one of the outperforming sectors over the last few years. The sector has returned 23% since 2014 compared to ~17% for the S&P 500 index (SPY).
As we saw in the previous part of this series, people are tending to eat at restaurants more than at home. So investing in restaurants may be a good idea, given the increasing disposable income. BITE is a targeted ETF providing exposure to the restaurant sector, with a 2016 YTD return of 7.18%.[1. Data as of 9/2/2016, as given by ETF.com]