A Brief on the Consumer

With the end of January, came the release of economic data points concerning the month of December, the fourth quarter and the year 2019. While the economy is a composite of several moving parts, the consumer remains an anchor to GDP growth. A brief look at income and spending helps assess its contribution to, and its future prospects, vis-à-vis the economy.

The health of the consumer can, in large part, be attributed to income levels and growth in earnings, which, along with confidence in the economic outlook, can meaningfully impact spending, an essential anchor and direct input to the US economy.

From the latest numbers, it is clear that income growth retreated in 2019. Exhibit 1 suggests that real disposable income growth has consistently struggled to reach cycle highs in 2014 and 2015. Although, it was temporarily boosted in 2018—a year that saw peak annual GDP growth rivaled only by 2015. Just as income growth retreated in 2019, consumer spending followed suit.

Exhibit 1: Real disposable income and spending year-over-year (%)

Sources: BEA, Haver

Should income growth in 2018 prove to be a recent high, a distinct possibility as the cycle advances in age, consumption growth would invariably moderate in 2020 and beyond. This would especially be the case if growth aggregate hours worked, a major component of the labor income proxy (i.e., the fuel for the consumer), continues to moderate. If that is the case, economic output in 2020 would likely be pressured as consumption contributes less to GDP growth (Exhibit 2.)

Exhibit 2: Personal consumption expenditures: contribution to real GDP % change

Sources: BEA, Haver

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the authors

About the authors

Francis P. Rybinski, CFA, Chief Macro Strategist & D. Harris Kere, CFA, Investment Strategist