by Russ Koesterich
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Global Chief Investment Strategist
By most measures, the recovery that began in 2009 has been a disappointment. In particular, household spending, long the lifeblood of the U.S. economy, has never rebounded as expected. U.S. real personal consumption has grown annually at around 2% since the end of the recession, well below the long-term average of nearly 3.5%. Nor is there much evidence that this is improving. In the second quarter, real personal consumption grew at only a 1.8% rate.
But behind the weak spending is a troubling, longer term trend: stagnant income growth. After all, the persistent weakness in consumption is somewhat puzzling. Consumer debt is slowly normalizing, household wealth recently hit a nominal peak and the housing market is roaring back to life. What is still missing is real or inflation-adjusted income growth. While consumers can, and often do, spend more than they make, ultimately income drives consumption. Without faster income growth, it will be difficult for household spending, and hence the broader economy, to match its long-term growth rate.
This paper takes a look at sluggish income growth and what it means for both the economy and the markets. Unfortunately, there are a number of factors, not all of them cyclical, impeding income growth. The opening up of emerging markets and technological change are likely to continue to impact wage growth for years to come.
Although we believe income growth will accelerate as the job market improves, we don’t see income growth returning to its long-term average anytime soon. In addition, the impact of these longer term trends is likely to continue to hit the middle of the income distribution the hardest. As a result, lower and middle income Americans are likely to see the slowest growth.
Modestly weaker income growth and spending, particularly for middle-class consumers, suggest that consumer spending is likely to continue to shrink relative to other sectors of the economy. It also implies that investors want to be cautious on any company dependent on middle-class consumption, particularly those with static market share.
Previous Market Perspectives
- Playing Defense Market Perspectives (November 2013)
Russ Koesterich and Dan Morillo explore the tradeoffs involved in "Playing Defense." (November 2013)
- Case for Emerging Markets (October 2013)
Russ Koesterich takes a look and makes the long term case for emerging markets.(October 2013)
- Investing in a Rising Rate Environment (September 2013)
Russ Koesterich discusses, Investing in a Rising Rate Environment and what a potentially new investment landscape means for investors. (September 2013)
- What's Next in 2013? (Mid-Year Outlook)
Russ Koesterich, Jeff Rosenberg and Peter Hayes take a look at where we’ve been – and what we might expect for the remainder of the year in (Mid-Year Outlook)
- What does the US energy boom mean for the economy and investors? (July 2013)
Russ Koesterich describes what the US energy boom means for the economy and investors (July 2013)
- Are We In a Bubble? Where and How to Find Value in Today's Market (June 2013)
Russ Koesterich describes Where and How to Find Value in Today's Market (June 2013)
- The End of the consumer? What the long-term decline of consumption means for investors (May 2013)
Russ Koesterich describes what the long-term decline of consumption means for investors (May 2013)
- The Case for Emerging Market Bonds (April 2013)
Russ Koesterich explains why it can play a significant role in a portfolio. (April 2013)
- Living in a Zero-Rate World (March 2013)
The Impact of Fed Policy on the Economy and Inflation (March 2013)
- Breaking Bad Behaviors (February 2013)
Understanding Investing Biases and How to Overcome Them (February 2013)
- 2013 Outlook (January 2013)
Russ Koesterich discusse Three Scenarios for the Coming Year (January 2013)
- The Slow Mo Economy (December 2012)
Russ Koesterich discusse preparing for slow US growth over the long term.
- Europe at a Crossroads: The Outlook and Opportunities
Russ Koesterich discusses where the opportunities are - and how there is still much work to be done to address Europe's problems.