The Importance Of The American Consumer

The obvious inference of the chart above is the enormous economic importance of the US consumer, contributing fully 17% to global GDP, greater than the entire economy of China! This is an enormous number for the population of one nation. The condition of the US consumer should be monitored for insights into the current and future direction of the US and world economy.

American consumer spending since the financial crisis of 2008 has been supported by unprecedented economic stimulus by the Fed which has produced the strongest economy in the developed world. Though Quantitative Easing has officially ended, and the Fed has raised interest rates a host of times, rates remain low in absolute terms from a historical perspective. Low-interest rates have made larges purchases such as homes and automobiles more affordable for more consumers.

The product of an extended period of low interest rates is an unprecedented level of consumer debt, as demonstrated in the following chart.

The current elevated level of debt was built during an unusually long economic expansion characterized by low interest rates. The consequences of this debt burden will be felt during the next recession, with the rising unemployment levels and tighter lending standards typical of a recessionary environment. Interest rates are expected to decline in a recession, but declining rates will not completely offset the risks for those most vulnerable.

The pressure of a recession on those financially extended will have both a practical and psychological impact on spending. We can anticipate a sharper decline in consumer spending than is typical, making the next recession more severe. The large share of global GDP accounted for by the American consumer will mean that significantly decreased spending will have negative consequences for the global economy.

The charts above support our long-held beliefs that the next recession will be sharper than most and that there is great value in considering a broad range of markets to get a clearer picture of the investing landscape.

Disclaimer: 

This material is sourced from the Globalinvestmentletter.com website and is subject to the terms ...

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