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Is the 1Q17 Consumer Spending Slowdown an Aberration?

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Consumer spending

Consumer spending accounts for almost two-thirds of the US economy. In 1Q17, consumer spending rose 0.3% YoY (year-over-year), the slowest pace seen since the fourth quarter of 2009. It is also significantly lower than the 3.5% YoY growth seen in 4Q16.

The slow growth in consumer spending is due to low demand for heating products and utility services, a result of less severe winter conditions. Another factor that impacted consumer spending was rising inflation.

According to the University of Michigan Consumer Sentiment Index, consumer confidence fell 94.5% in June 2017, 2.6 percentage points lower than it was in May 2017. It was, however, higher than the 93.5% consumer confidence level seen in June 2016.

Weak job growth continued in May. Approximately 138,000 net jobs were added, compared with 50,000 jobs in April and 174,000 in March. This figure is also lower than the 2016 average of 187,000.

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The labor market continues to be near full employment. The unemployment rate fell 4.3% YoY in May 2017, and the labor force participation rate was extremely low at 62.7%. Employment is still three percentage points below the 2008 pre-recession level, and wages grew by just $0.03, a growth of 2.5% YoY. The reducing wage growth suggests weakness in the labor market and more room for labor market tightening.

Will consumer spending improve?

Most analysts continue to feel that the slowdown in consumer and business spending is temporary and related to seasonal factors. Despite the recent slow growth, consumer spending continues to remain at a multiyear high.

The PowerShares Dynamic Leisure & Entertainment ETF (PEJ) invests ~5.0% of its portfolio in both Delta Air Lines (DAL) and American Airlines (AAL), 4.7% of its portfolio in United Continental (UAL), and 2.7% in JetBlue Airways (JBLU). In the next part, we’ll analyze the airline industry’s demand trends.

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