Long Live the U.S. Consumer

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by Jason Norris, CFA
Executive Vice President of Research

This morning the Bureau of Economic Analysis released the second quarter GDP estimate and, while growth was down 3.1 percent from the first quarter, it was still a healthy 2.1 percent with consumer and government spending that was strong. The uncertainty over trade led to a decline of 0.6 percent in business investments whereas personal consumption was up 4.3 percent and government spending increased 5.0 percent, the highest level since 2009.

The data also showed that consumers have plenty of dry powder. While total consumer debt hit a record level of $4 trillion, debt service remains relatively low.

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Source: Federal Reserve Bank of St. Louis

While debt service continues to trend higher, it is roughly at the 40-year-average level. Also, the personal saving rate remains high at roughly 8.5 percent. Therefore, with low unemployment, wage growth and a healthy balance sheet, the U.S. consumer should continue to remain resilient.

What Earnings Recession?

The healthy U.S. economy has been a tailwind for equities. Initially, second quarter speculation was negative, but the earnings season reality has been relatively strong. Through Thursday, 208 companies of the 500 belonging to the S&P have reported earnings for the second calendar quarter: 71 percent of them posted better-than-expected bottom line results, which were 6.2 percent higher than expectations. The most upside is in the technology and communications sectors, with a surprising average upside of over 10 percent.

With low inflation, continued earnings growth and no recession in sight, equities continue to remain attractive in our view. However, trade uncertainties with China continue to persist, and the federal government is going to take a closer look at the business practices of large technology companies. It’s too early to handicap the risks to some of these names, but it does increase uncertainty in the space. Our belief is the company fundamentals will outweigh the political risk.

Takeaways for the Week:

  • Consumer spending remains buoyant

  • Corporate earnings continue to be resilient