Risk assets have recently lifted higher thanks to the rejuvenation of “animal spirits” and the rising sentiment among spenders in the U.S. Gauges such as the Conference Board’s Consumer Confidence Index and the National Federation of Independent Business’ (NFIB) Index of Small Business Optimism are the most optimistic they’ve been in a decade, while equities hover near all-time highs. Believers in the animal spirits are calling for an increase in consumption-driven growth to provide additional tailwinds to risk assets this year. However, the market may be quick in overlooking a popular headline from yesteryear: the rise of the “smart” consumer.
This week’s chart plots the personal savings rate over the past 30 years with the Consumer Confidence Index and the 10-year Treasury yield. Historically, rising consumer confidence has coincided with a falling personal savings rate, meaning consumers spend more money when their attitude towards current and short-term business conditions, employment and personal income is improving. Falling interest rates have also been a persistent tailwind to personal consumption, as they reduce the incentive to save and make financing a new home or auto purchase more affordable.
Since the end of the global financial crisis, we’ve seen consumer spending that is more inelastic to changes in consumer confidence and interest rates. So why aren’t consumers increasing their spending amid easier access to financing and improved outlooks on jobs and the economy? First, the U.S. homeownership rate has been in decline since 2004 and is the lowest it has been in 25 years. The ownership rate is especially low among millennials, who may be wary of purchasing a home after seeing older generations suffer through a housing bubble. New home purchases are an important driver for other discretionary spending, such as appliances, home improvement, furniture, etc. Second, the improvement in auto sales showed signs of weakness last year. Although total light vehicle sales increased in 2016, passenger car sales actually declined 4.7% year over year. Light truck sales, which likely got a boost from low oil and gas prices, were the source of the overall increase. Finally, generational differences among consumers can help explain the spending dynamic. Confidence is higher now among older consumers relative to younger consumers. Older consumers generally have longer credit histories and easier access to credit, but lower spending needs than younger consumers.Key Takeaway:
The hopes for a further rally in risk assets are heavily contingent on increased consumption to drive growth in 2017. Many of the current sentiment indicators suggest consumers’ animal spirits are coming alive and will drive an increase in consumer spending. However, recent increases in both interest rates (borrowing costs) and oil and gas prices may defang these spirits. Homeownership rates and auto sales are two data points to watch closely to see whether or not consumption-fueled growth will surface this year.
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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