The Lost Decade And Half For U.S. Consumers

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Includes: RINF
by: Disruptive Investor

Analysis Overview - The per capita disposable personal income growth for the last 15 years in the United States is indicative of the point that there has been potential loss of purchasing power during this period.

Disposable Personal Income Adjusted For CPI Inflation - The chart below gives the per capita disposable personal income for the United States for the period 2000-2015. The income has been adjusted for CPI inflation using the CPI inflation calculator.

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During these 15 years, the per capita disposable income has grown from $26,206 to $30,176 when adjusted for inflation. In other words, the per capita disposable personal income has grown at a CAGR of 0.94% during these 15 years.

The important point to note here is that I am using the government released CPI numbers and real inflation for a middle class with significantly higher income. Therefore, it is very likely that consumers have experienced decline in purchasing power during this period.

Further, with continued expansionary monetary policies (real interest rates remaining negative), I expect loss in purchasing power for consumers to continue in the coming years/decade.

Another point that is worth noting here is that US demographics point towards an increasing number of people not in the labour force. This is evident from the chart below, which shows that 93.7 million people are not in the labour force and since the beginning of 2007, nearly 14 million people have been out of the labour force.

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The reason for highlighting this point is to underscore the possibility of per capita disposable income declining in the coming years (without adjusting for inflation). Further, with US being a consumption-based economy, there are difficult times ahead and I expect real US economic growth to remain sluggish for a prolonged period.

The investment implications are as follows:

1) To beat inflation, consumers need to be invested in assets that can provide robust returns than saving cash in banks or investing in any government securities. Idle cash will continue to lose purchasing power.

2) It is important to have a part (10% to 15%) of the portfolio in gold as the hard asset is probably the only honest currency in the world and still serves as a store of value.

3) It is important to have exposure to emerging market equities, as there is still significant impending growth in these economies. Over the next decade, emerging market equities are likely to outperform developed market equities.