Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Economic Insights

It should be very hard to concoct a recession story driven by sharp downward pressure from consumer spending; but brace yourself, that’s what you’re probably going to be hearing.

We’ve argued all along that the economic data do not, thus far, support the narrative of the financial media that a recession is around the corner. And as far as our projections go—so far, so good. But wait. The strong pace of real consumer spending is probably not sustainable. Does that mean a recession is nigh?   

Following is a brief analysis of the historical data on consumer spending and what that data can tell us about the near-term outlook for recession.  

Real consumer spending is on track to increase at a 4% seasonally adjusted annual rate in the third quarter of 2019 after advancing 4.7% in the second quarter. This pace is unsustainable, in our opinion, and it will surely slow down sharply in coming quarters. Inasmuch as it will have been responsible for more than 100% of gross domestic product (GDP) growth in the second and third quarters, at least in a pure accounting sense, the inevitable, and very predictable, slowdown will supply grist for the recession narrative mill.

 

Chart 1. The Current Growth Rate of U.S. Real Consumer Spending is Probably Unsustainable
U.S. real consumer spending, seasonally adjusted annual rate (SAAR), (December 2009-August 2019)

Source: Bloomberg. Data as of August 30, 2019.
Past performance is not a reliable indicator or guarantee of future results.  For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

But consumer spending, and household expenditure more broadly, is made up of cyclical and non-cyclical components. The cyclical components—consumer durables and residential investment—are expenditures that can be postponed and thus vulnerable to cuts in a downturn, when households suffer unexpected losses of current and future income and wealth. The broadly non-cyclical components continue rising in recessions, as they cannot be postponed easily in the short run; spending on health care, education, and food come to mind.

This pattern is easily observable in historical expenditure patterns around recessions, the shaded regions in Chart 2. Household capital spending tends to peak before a downturn, fall during the recession, and then recover strongly when the recession ends. Household nondiscretionary spending keeps rising almost no matter what, even during the very deep 1974-75, 1981-82, and 2008-2009 recessions.

 

Chart 2. A Clear Pattern of Expenditures is Visible Around Historical Recessions*
Household capital and nondiscretionary spending, historical expenditure patterns around recessions

Source: Bloomberg.  Data as of March 30, 2017. *The U.S. economy has not experienced a recession since the Great Recession of 2008-09. 
Past performance is not a reliable indicator or guarantee of future results.  For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

The important thing to keep in mind is that household capital spending and household nondiscretionary spending are of very different sizes. Capital spending is around 11% of GDP while nondiscretionary spending is about 61%. Moreover, as shown in Chart 3, household capital spending has been trending downwards over the long-term and is currently below its lows in previous recession while nondiscretionary spending is close to its highest ever share. We believe this imparts a strong element of stability to GDP overall, and makes it harder to induce a recession since there is no excess to unwind in the cyclical component of spending.

 

Chart 3. Capital Spending and Nondiscretionary Spending Show Disparate Long-term Trends
Cyclical and non-cyclical consumer spending (% of GDP), (March 1947-March 2017)

Source: Bloomberg.  Data as of March 30, 2017. Data encompasses periods of U.S. recession as in Chart 2; the U.S. has not experienced a recession since the Great Recession of 2008-09,
Past performance is not a reliable indicator or guarantee of future results.  For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

With the household saving rate close to 8%, real net worth at a record high, falling gasoline prices, and a near historical low share of consumer capital spending in GDP, it should be very hard to concoct a recession story driven by sharp downward pressure from consumer spending. But brace yourself, that’s what you’re going to be hearing.

In fact, strong hints of that narrative are already in the air. From a Bloomberg story on September 9, 2019:

Federal Reserve officials are weighing two competing forces in the U.S. economy: the resilience of the consumer versus the fallout from uncertainty around trade disputes and weaker global growth.

“The consumer is now carrying all of the weight, or much of the weight, for growth going forward,” Federal Reserve Bank of New York President John Williams told reporters Wednesday after giving a speech in New York. “One thing, though, about consumer spending that you have to be careful about is it’s not really a leading indicator.”

As threats from U.S.–China trade tensions have chilled business confidence and investment, consumers have been the main drivers of growth. There’s weakness surfacing in manufacturing and concerns brewing in financial markets that the world economy may be heading toward recession.

The logical conclusion of this line of reasoning, in our opinion, is that if U.S. consumer spending reverts to normal, weakness elsewhere will dominate and the whole economy will spiral downwards.

What’s more likely is that consumer spending will slow but not by enough to cause a recession as it is largely non-cyclical and the cyclical components are too small to drive GDP growth decisively in either direction.

 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

RELATED TOPICS

ABOUT THE AUTHOR

LinkedIn_RightRail-Banner-270
image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field