Interesting info on How Healthy is the US Consumer? (from my financial manager) Consumers make up 70% of the US GDP, so economists and investors closely monitor the purchasing behavior of individuals. This category includes: • Durable goods like cars, furniture and appliances (10-15% of annual consumption) • Non-durable goods such as food, clothing and gasoline (25-30% of annual consumption) • Services including entertainment, information, education and health care (55-60% consumption) There have been a few headlines recently about large retailers missing earnings or revenue estimates due to softening demand from the consumer. Let’s take a closer look at the health of the US consumer. Durable goods consumption has increased 8% since January 2012, according to the Bureau of Economic Analysis (BEA). Nondurable goods consumption has increased 4% since January 2012 (BEA). Services have increased about 4.5% since January 2012 (BEA). As you can see, the US economy is making progress, but growth is very slow. While durable goods have performed decently, they only make up 10-15% of annual consumption. Non-durable goods and services, which make up 85-90% of consumption figures, have been growing at less than 3% annually. This is not enough to provide the robust economic growth needed to bring the unemployment rate down in our country. One major factor affecting the consumer’s health is the price of oil, particularly as it makes its way to gasoline pumps. We have seen a spike in oil prices recently due to unrest in the Middle East. If this increase is transferred to gas prices for a sustained period of time, it could negatively impact the consumer. Another key factor for consumers involves interest rates. Rising interest rates increase borrowing costs for consumers and price inflation can reduce the amount people purchase. Rates have continued to rise recently with the 10 Year US Treasury yield hitting 2.9%. Part of the reason rates have increased is because the US Federal Reserve has announced it may reduce the amount of bonds it purchases each month. This has been referred to as “tapering.” Buying bonds helps contain rising interest rates. The size and exact timing remain a point of debate, but the consensus seems to have formed that the Fed will reduce purchases in September by about $15-$20 billion per month. This means the Fed will still buy about $65 billion in bonds monthly, so it will retain a significant role in this arena. Other forces affecting interest rates include actions by countries which purchase our bonds. Recent data is showing that Japan and China are selling, rather than buying, US Treasury bonds. Is this simply because they believe rates are heading higher and they made some sales to pare their positions? Or is it the need to raise cash for their own economies? Time will tell, but it has had an upward effect on our interest rates. Even with the recent rise in yields, we are still at historically low interest rates in our economy. The Fed remains determined to ease the path forward for the consumer. If rates start moving up dramatically, the Fed can step back in and modify its policy if necessary. We may continue to experience some rockiness as market players adjust to the new interest rate reality.
Posted on: Tue, 03 Sep 2013 21:14:30 +0000
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