We believe “the one thing investors can’t ignore in 2020” will be the financial health and confidence of the US consumer. Will Mr & Mrs USA just keep on trucking?
With growth slowing in manufacturing and trade around the world, the US consumer has remained the sole bright spot of the ongoing economic expansion – not a huge surprise, given that nearly 70% of US GDP is exposed to consumer spending.
US consumers have had very solid tailwinds over the last few years: unemployment sits at multi-decade lows; real wage growth has picked up and household balance sheets have been substantially improved from levels seen prior to the Global Financial Crisis.
Combined with very low inflation and some tax relief, the average American consumer is feeling wealthier and has therefore been inclined to continue spending.
Chart source: US Department of Labour, Factset.
However, consumer spending is ultimately highly correlated with confidence in the future of the economy, both at a household and business level. The weak economic data seen in the second half of 2019 has been largely at the business level, and the main cause seems to be the confidence- and certainty-sapping effects of the ongoing trade war.
US consumers, on the other hand, have mostly shrugged off the uncertainty. The decline in 30-year fixed mortgage rates have positively impacted housing activity, and refinancing volumes have increased significantly over the last year as rates have come down. Household durable purchases have remained solid.
Given that 2020 is also a Presidential election year in the States, it would seem obvious that the White House understands it cannot afford consumers to feel the pinch if President Trump wants to see a second term.
Should US consumer confidence roll over and spending slow dramatically, it will have a disproportionate effect on US – and global – economic growth.
Vice versa, if the US consumer remains confident… Time will tell, but in our view, this is the key variable of 2020.
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