This is Brad Barrie, Chief Investment Officer and Portfolio Manager with Dynamic Wealth Group. Welcome to this market and economic update. With the stock market near all-time highs and many parts of the economy still strong, many investors are wondering about the health of the U.S. consumer.
In the next few minutes, we’ll talk about how consumers are faring given the strong job market and what this might mean for economic and market trends.
Let’s first take a look at how we measure the size of the economy. GDP, or gross domestic product, is often broken out into consumer spending, business investment, government spending, and the trade balance.
Consumer spending has increased as a share of GDP over the past twenty years. Meanwhile, government spending has declined, again as a percentage of the total. Business investment is still about 18% of spending but has fluctuated quite a bit on a quarterly basis.
Thus, it’s easy to see that consumer spending is the backbone of the U.S. economy with 68% of total expenditures. How consumers feel whether they are willing to spend on everyday goods and services and also big-ticket items, has an important impact on the overall economy.
Second, this chart shows the University of Michigan Consumer Surveys. What you can see is that consumer sentiment fell in 2022 due to high inflation, a rocky economy, and the bear market.
However, sentiment has been rebounding since then as inflation has improved. This same survey shows that consumers expect only 3% inflation over the next year, a significant improvement.
Another period to highlight is the decade following the 2008 financial crisis. Consumer sentiment was low for years due to the poor job market. In fact, many gave up looking for work during that time due to the housing bust and falling manufacturing activity in this country.
In many ways, today’s environment is the opposite. Even though there are many economic concerns, the job market has been remarkably strong. Unemployment is only 3.7% – one of the best rates in history – and wages rose over 4% during the past year. While there are layoffs in areas like tech, the fact that most people have jobs is helping to keep consumer spending strong.
Finally, while consumer spending has been strong, there are signs that trends could slow. Households are spending much of what they saved during and after the pandemic. The national average savings rate is only 3.7%, well below the historical average.
This chart shows that retail sales have also decelerated, even at online retailers. This could act as a drag on the overall economy in the coming months.
Still, the fact that consumers have been strong has helped to keep the economy out of recession and boost the stock market to new all-time highs. Investors should keep this in mind as they assess the market situation for the rest of this year.
We hope you found these insights valuable. Our goal at Dynamic Wealth Group is not to predict the future, but instead prepare for the future regardless of what happens. We do this through our Multi-Dimensional Asset Allocation philosophy. Through this innovative approach we help to Simplify the Complexity of investment management, offering various services to financial advisors. If you would like to discuss any of these topics in more detail, please feel free to reach out. We look forward to speaking with you.