Against the current environment of low growth, the consumer stands out as the engine of the U.S. economy. Consumption accounts for 69% of U.S. growth and is supporting almost all aggregate demand and revenue generation in the economy.12

Source: Conference Board, Census Bureau, FS Investments as of September 30, 2017 SENTIMENT IS SURGING, BUT SPENDING IS SUBDUED Consumer confidence Retail sales 2010 2011 2012 2013 2014 2015 2016 2017 12% 8% 4% 0% 120 130 100 90 80 70 60 50 40 110 Retail sales %y/y Consumer confidence

We will be watching: Consumer sentiment indicators serve as leading indicators of actual consumer activity. Consumer confidence has steadily recovered since the recession, boosted by a solid labor market. However, consumer sentiment is now outpacing actual consumption. For example, the Conference Board measure of confidence posted a 15-year high in December. Real data shows retail sales grew 4.5% year over year in the first half of 2017, which is solid but well below the 6.1% year over year average during past episodes when consumer confidence was over the 120 threshold.

Risks to our view: Consumer spending is, in the end, all about confidence. Trillions of dollars of activity is based on the spending-vs-savings decisions of millions of people and, at its crux, reflects confidence in the economy. Should uncertainty creep into the consumer psyche via market volatility, heightened policy uncertainty, or an unforeseeable event, consumer confidence could suffer and take consumer spending with it.

12 U.S. Census Bureau as of October 5, 2017.

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