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
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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