Broker Check

Media attention on consumer spending can distort the view of the way the economy really works

December 09, 2019
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During the next couple of days, you’re going to see lots of stories about the strength of consumer spending. Early reports say Black Friday on-line sales hit a record high, up 14% from a year ago, following a 17% increase on Thanksgiving Day itself. Black Friday sales at brick and mortar stores were up 4.2% from a year ago. So much for the theory that brick and mortar is dead or the economy is in trouble.

This shouldn’t surprise anyone who’s paying attention to underlying data on workers. The unemployment rate is hovering near a 50-year low, job growth remains robust, wage growth is solid, and wages are growing faster for low-income workers than high-income workers. Overall, private-sector wages and salaries are up 5.2% from a year ago.

Meanwhile, we think the end of the GM strike means a sharp rebound in payroll growth in November. In addition, consumers are in solid financial shape. Consumer debts are the lowest relative to assets since 1984. Household debt service relative to after-tax income is tied for the lowest on record (data go back to 1980).

It’s important, however, not to let all the media attention on consumer spending distort the view of the way the economy really works. Consumer spending is only 38% of economy-wide gross output. In other words, consumer spending is a much smaller part of total economic activity than GDP suggests. That’s why, as much as we like to see solid numbers on consumer spending, we see this as an effect, not a cause of our bounty. The primary cause is the innovation and risk-taking of entrepreneurs.

This is why, if you want to know when the next recession is going to start, you need to pay careful attention to the environment for innovation and risk-taking, not how much people are spending. Yes, when the next recession comes – and we don’t see one for at least the next couple of years – consumer spending will likely falter. But that doesn’t mean slower consumer spending caused the recession. It’s just the natural and eventual consequence of a less healthy environment for businesses, small to large.

Less production would mean fewer workers and, in turn, less purchasing power. So enjoy the good news you see the next couple days, but keep in mind that healthy growth in consumer spending is exactly what you should expect in an economy where tax rates are relatively low, business regulation has slowed, and monetary policy isn’t tight. If we’re right, we should see more of the same kinds of headlines for at least the next couple of years.

Equities: US equity markets moved higher last week on hopes of a trade deal between the US and China. The Small-Cap Russell 2000 turned in the best performance, followed by the technology-heavy NASDAQ, S&P 500 and, bringing up the rear, the Dow. This order of performance in the indexes is the classic order for a risk-on week for the markets. As expected, the volume of the week last week was very low as the markets were closed 1.5 days for Thanksgiving.

○ Russell 2000 (2.24%) – Below Average volume
○ NASDAQ (1.71%) – Below Average volume
○ S&P 500 (0.99%) – Below Average volume
○ Dow (0.63%) – Below Average volume

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