U.S. Consumer Spending in the Holiday Season – More Gifts of Positive Returns or A Bag of Coal?

Headed into the final quarter of the calendar year, we turn our attention to the upcoming holiday season, specifically to the sustainability of U.S. consumer spending in this important period for the economy.  Keep in mind that consumer spending is a key driver of the U.S. economy making up nearly 70% of the U.S.’s $21 trillion economy measured in Gross Domestic Product (GDP)[1].

Will we finish the year with the gift of sustained positive year-end market returns or finish with a bag of coal like we experienced last year?  Recall that last year the S&P 500 dropped (-14%) in the fourth quarter, which resulted in a negative total return of (-4%) for calendar 2018. 

Thus far, the market has provided a bounty with the S&P 500 Index up nearly +21% on a total return basis.  We believe that intact U.S. consumer spending, measured as Personal Consumption Expenditures (PCE) by the U.S. Department of Commerce, has provided a ballast that has helped sustain investor sentiment, company fundamentals, and in strong year-to-date equity market performance (Exhibit 1).  That said, we acknowledge increased pressure points on U.S consumer spending which add to year-end market risks.

Despite Increased Headwinds, U.S. Consumer Spending Remains Intact - Holiday Spend Is Key

The tug-of-war between positive and negative market headlines has remained a constant thus far in 2019.  On the negative side, we can see slowing global GDP growth, lower manufacturing and non-manufacturing activity (measured by the global Purchasing Managers’ Index (PMI) and Institute for Supply Management (ISM) indicators) and slowing U.S. job growth.  Recent positive data includes stable income growth, low unemployment, and low rates.

Through the second quarter of 2019 U.S. consumer spending remained intact with growth of +2.6% year over year (YoY).Notably, monthly consumer spending data through August has shown some softness with +0.1% month over month (MoM) growth, below the trailing 12-month average growth of +0.2% MoM[2]. Looking ahead, we remain optimistic on the sustainability of U.S. consumer spending into year-end as employment and income trends remain supportive.For perspective, we note the recent holiday retail sales forecast published by the National Retail Federation (NRF) which anticipates sales growth of +3.8% to +4.2% YoY (Exhibit 2).This compares to average holiday sales growth of +3.7% YoY over the last five years.[3]

Although still positive on sustained U.S. spending growth, we acknowledge increased risks.  Accordingly, our investment posture remains balanced between reduced exposure to the cyclical sectors directly driven by consumer spending, and higher exposure to sectors such as Health Care and Technology.  We believe these sectors benefit from longer-term secular revenue growth drivers. 

[1] U.S. Department of Commerce, Bureau of Economic Analysis, GDP Release, 2Q 2019, 9/26/2019.

[2] U.S. Department of Commerce, Bureau of Economic Analysis, Personal Income and Outlays: August 2019, 9/27/2019. 

[3] National Retail Federation, Winter Holidays Sales Forecast, 10/3/2019.