Mini Macro Memo 1: Consumer Spending

Updated: Aug 5, 2020


In my first of what I hope to be a regular series of short macro updates, I want to touch on one of the main points I made in my last full-length article, consumer spending.


The United States economy is propped up on the spending of the everyday consumer. Every year, around 70% of GDP is represented by this domestic spending. When consumer sentiment surrounding the economy is strong, this can be good. Had we gone into a natural recession some economists supported the idea that these consumers would be the reason for a soft-landing. However, today I would like to paint a slightly different picture with recent data pulled from the Bureau of Economic Analysis.


The chart below shows the personal consumption expenditures contrasted with the personal income of the U.S. consumer. As we can see, the percent change in personal income (orange) has remained relatively flat thanks in large part to the stimulus packages governments have been handing out. The chart shows us that the U.S. government did a decent job (thus far) in making sure the personal income of U.S. citizens did not become negatively affected.

The more interesting piece, however, is that consumer spending (represented by the green line) had fallen quite dramatically. A contributing factor to this decline is that it is obviously quite difficult to spend normally when the economy is shut down. As economies open further, and we continue to receive more data, an increasingly detailed picture will be painted. Personally, I view this as suppressed confidence in the consumer space which could hamper the overall recovery of many corporations. This does not mean that stock prices will not continue to rise, but it is important to be wary of these market price recoveries as they assume a quick recovery of demand and spending in a numerous amount of cases.


In my professional opinion, it is important to be invested. However, we should do ourselves a favor and not fall into the trap that is “FOMO” (fear of missing out). The prudent way to invest through both a recession and a bull market, is to understand what is in your portfolio, and to own quality companies at quality prices. That is, to own companies with competitive advantages and a strong balance sheet at a discount to what would be considered their conservative intrinsic value. Succumbing to “FOMO” will ensure that you do the complete opposite.

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