Most economists and investors understood that it was going to take some time for U.S. consumers to repair their overextended balance sheets after the 2008 crisis. But seven years after the bursting of the credit bubble, things haven’t changed much. Even as job growth has surged and gasoline prices have plunged, consumers are proving slow to respond.
Since the recession ended in 2009, U.S. real household consumption has remained well below the historical average. In the 60 years between 1947 and 2007, real household consumption grew annually by an average of 3.6 percent. Since 2008, it has been closer to 1.5 percent. Even if you exclude the recession, the average is still only around 2.3 percent.
The decline is partly a function of a measurement problem. In a service-driven, “sharing” economy, measuring consumption has become more difficult. That said, it’s hard to argue with the fact that something has changed.
In fact, as I write in my new Market Perspectives paper, “The Hangover: The Rise and Fall of the U.S. Consumer,” the slowdown in consumption predates the crisis. Indeed, the challenges facing U.S. households are tied to several secular trends that won’t be going away anytime soon.
One such trend: stagnating wages. Prior to the recession, there was a very consistent and statistically significant relationship between job creation and wage growth. However, since the financial crisis, that relationship seems to have broken down.
Though there likely isn’t much slack left in the U.S. labor market, we haven’t seen an accompanying broad pickup in wages. This may be because many of the new jobs in the current recovery are low paying or part time. In other words while economic logic suggests that wages should accelerate along with jobs, structural forces changing the makeup of the labor market—including advances in technology and an aging population—may inhibit wage growth from reverting back to the post-WWII norm.
Of course, spending can and does deviate from income. After all, stagnant income growth has been a persistent headwind for several decades, raising the question of how households managed to fund a fairly consistent period of rising consumption before the 2008 crisis.
There were a number of factors behind this phenomenon: the rise of the two-income family, a declining savings rate, a significant rise in government transfer payments and a multi-decade expansion in household credit. But these factors no longer appear to be tailwinds to consumption.
For instance, the rise of women in the workforce enabled many households to deflect the impact of stagnant real wage growth. Unfortunately, this rise seems to have run its course. Between 2000 and 2014, female labor market participation declined to 56 percent from 59 percent, and there are few signs of its imminent recovery.
Meanwhile, though the savings rate has rebounded from last decade’s lows, it remains well below the historical average and likely has further to rise given an aging population that needs to fund a longer retirement.
At the same time, given the increasing burden that an aging population will place on the federal government, the trend of transfer payments flattering consumption probably isn’t sustainable. Finally, it’s unlikely that the typical U.S. family can return to its pre-crisis borrowing habits, considering that consumer debt-to-disposable income levels are still relatively high from a historical perspective.
Looking forward, this changing landscape means consumption is likely to remain modest, at least as compared to the post-WWII norm. In response, one segment of the market may prove vulnerable: U.S. consumer stocks, which have been outperforming the broader market for a number of years. Their outperformance may be difficult to maintain in an environment in which U.S. consumers struggle to regain their old swagger.
Source: The Hangover: The Rise and Fall of the U.S. Consumer
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.