Wednesday, October 3, 2012

The curious case of the American consumer

In my last post, I highlighted rising consumer confidence as one of the reasons to be bullish (see The bull case is still intact). The continuing strength of the American consumer has been a puzzle to me, as this has been an incredibly anemic recovery. This chart from Doug Short shows how employment growth has lagged past recoveries.

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.

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”.
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":
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.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

keithpiccirillo said...

Ken Heebner has based his housing picks on population outpacing new builds as well.