The Necessity of a Strong Consumer
Consistency is a big part of quality. Our search for consistency leads us to companies that generate dependable growth. And the most consistent growth engine of the world’s economy — decade after decade — has been the consumer. Household consumption sits at the center of our economy, accounting for over 70% of all activity in the United States. When threatened, government intervention has been there to help shore up consumption, come what may, and from administration to administration.
The reason for such policies are simple: employers all across the economy ultimately hire, invest, and produce to serve consumers. If consumption fails, employees are laid off, investment is cut, production falters, and businesses fail. Our history shows that the first priority is maintaining a steady “circular flow” of money throughout the economy by ensuring constant demand for goods and services — the main engine of which is the household consumer.
Long History of Steady, Dependable Growth
Consider Chart A below. Notice how consistent and steady growth in consumption has been throughout the years. It is hard to deny that there is strong evidence that, over time, consumption tends to grow along with personal income. Notice further that the graph shows income and consumption adjusted for inflation. From the early 1960s through today, there has been a solid and steady upward bias to these lines. Of course, the pandemic brought significant changes — more on that in a moment.
While there is clear and unequivocal evidence of growth decade to decade, there have been a few times when consumption and income faltered before resuming an upward climb. 1974, for example, real income and consumption declined by -2.5% and -2.2%, respectively. In 1980, real income stagnated (0% growth), causing consumption to drop by 1.5% that year. In 1991, real income and consumption both fell by about 1%. Finally, in the financial crisis of 2008-2009, real income fell by a whopping -5%, and consumption fell by -2.5%.
Over the past year through July, consumption is up 3.1% after 3.3% inflation according to newly released data from the Bureau of Economic Analysis (BEA). This growth rate is faster than the 2.4% trend growth rate since 2012. We expect consumption to return to the lower trend-line growth rate in the years ahead. If this happens as expected, real consumption growth will slow to about 1% for the next few years.
The Pandemic Era
The above scenario overlooks one glaring issue — the immense impact of the pandemic and government responses following 2020. As Chart B (below) shows, the annual change in both income and consumption around the pandemic produced unprecedented volatility. Incomes, which include government payments to households and consumption, went on a wild ride. Today, many pandemic-era subsidies and supports are either gone or going away. Hence, some businesses that benefitted from government stimulus-aided sales to consumers are seeing softness in business.
On the plus side, however, wages are growing, while the unemployment rate of 3.6% is near a 50-year low. For example, payroll processor Automatic Data Processing (ADP) reports that job changers are seeing an average 9.5% wage increase. Hourly wages are also up 4.4% year-over-year through July, according to the Bureau of Labor Statistics (BLS).
Although recent years brought big swings in income and growth, the consumer has proven to be a consistent and dependable source of growth for many decades. That said, we understand that the level of consumer spending that accompanied unprecedented stimulus in 2021-2022 is set to fade. Now we see consumption returning to trend. We expect this process to continue over the next two to three years. We believe world-class, financially solid, consumer-focused franchises should be held for the long-haul. We will continue to look for opportunities in quality businesses of all kinds as the process of “returning to normal” unfolds.
Kevin R. Caron, CFA
Senior Portfolio Manager
Senior Portfolio Manager
Steve Lerit, CFA
Senior Risk Manager
Internal Relationship Manager
Director, External Sales and Marketing
Client Portfolio Manager
The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecast in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.
Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small-company stocks are typically more volatile and carry additional risks since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. Bond laddering does not assure a profit or protect against loss in a declining market. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. Changes in market conditions or a company’s financial condition may impact a company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.
All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.
This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.
The securities discussed in this material were selected due to recent changes in the strategies. This selection criterion is not based on any measurement of performance of the underlying security.
Washington Crossing Advisors, LLC is a wholly-owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF). Registration with the SEC implies no level of sophistication in investment management.