Despite taking all these hits, the American consumer is not on his back. Doug Short also highlights how important consumer spending is to the American economy. The chart below shows the progress of the percentage share of Personal Consumption Expenditure (PCE) to GDP.
Here's the BIG question: If the economy depends so much on the consumer and the recovery in employment is so weak, why is the consumer showing such surprising strength?
It's housing, stupid!
A Gillian Tett article in the FT may have the answer. Economists think about GDP growth as a measure of how the economy progress, for consumers and the electorate, housing matters a lot more [emphasis added]:
In the financial markets, it is generally assumed that “the economy” is something defined by GDP data; the figures that excite analysts are data on inflation, say, or output and unemployment.While the main thrust of the article was on voter attitudes affects the November elections, it has economic implications as well. Tett focused on the "crucial importance of watching house prices":
However, if a recent survey from Absolute Strategy Research, an economics research group, is correct, it is not necessarily the GDP figures that matter to voters, nor even just the jobless numbers.
Instead, a crucial – but oft-ignored – factor that shapes how voters feel is that slippery issue of house prices. And judging from the ASR survey, a subtle-but-significant distinction has opened up between how people perceive those housing prices – and the wider economy – which reflects whether people define themselves as Democrats, Republicans, or part of that ever-swelling group of “independents”.
After all, if house prices do rise next year – whether due to quantitative easing, mortgage modifications, an enhanced foreclosure system, or anything else – this could have a big economic impact. Conversely, if the market remains flat, voter anger may swell.Housing seems to be putting in a bottom here. Calculated Risk has documented this development for the past few months. The Federal Reserve's latest QE plan for an open commitment to buy mortgages should further benefit the housing sector as well.
If the survey results from ASR are correct, then it should feed through to an even stronger American consumer in the months to come.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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