All Hail the Consumer- Potentially More Ammo for Consumer Spending
Latest Reading of 2nd Quarter GDP Shows Stronger “Details”
The latest government estimate for 2nd quarter gross-domestic-product (GDP) growth of 2.0% came in slightly lower than July’s preliminary estimate of 2.1% (lots of 2’s). More important, details of this report show underlying economic strength that will likely bolster the outlook for third-quarter GDP growth.
Consumers Strike Again
Personal consumption spending increased by 4.7% in the quarter representing the highest growth levels since 2014. Our key number, Final sales to private domestic purchasers, increased 3.5% compared to 3.2% for July’s preliminary estimate. Both show greater underlying strength in the economy than the headline GDP growth number suggests.
Lower Inventory Levels Helps 3rd Quarter GDP Potential
This report’s downward revision of inventory levels boosts the potential for third-quarter GDP growth. Very simply, lower inventories mean more end demand will be met from third-quarter production than from existing inventories. Because of both consumer strength and lower inventory levels, economists will likely raise their forecasts modestly for third-quarter GDP growth.
Increased Ammunition for Consumer Spending
With lower interest rates, homeowners can gain access to record levels of equity in their homes. That access should give consumers further ammunition to support their current high levels of consumption. Figure 1 shows the record level of tappable equity of over $6 trillion for U.S. mortgage holders. Roughly half of the homeowners with tappable equity carry first mortgages with interest rates 4.25% or higher. This compares to a national average interest rate of 3.60% for a 30-year mortgage. At the same time, most can tap into their home equity without increasing their monthly mortgage payments.
Tappable Equity of U.S. Mortgage Holders
Source: Black Knight, WSJ/Daily Shot
Consumer Poll—the Economy Better or Worse?
Figure 2 provides some yin to the yang for stronger consumer spending. The Quinnipiac Poll asks, “Do you think the nation’s economy is getting better or getting worse.” The poll’s results show some increasing cloudiness to the consumers’ outlook.
Poll—Economy Getting Better or Worse?
Source: Bloomberg, WSJ/Daily Shot
Neither the uncertainties of the trade war nor the better U.S. economic news today suggests investors move their asset mix in one direction or the other. Timing the market in our twitter/headline environment represents, in our view, a nearly impossible strategy. Therefore, we continue to recommend long-term investors maintain a balanced portfolio mix of equities, alternatives, and fixed income investments. This mix likely provides appropriate diversification for the current economic and investment environment.
Andrew J. Melnick, CFA
Chief Investment Strategist
First Capital Investment Partners