Personal consumption expenditure as a percentage GDP for the United States was 71.2% in 2011. Sustaining consumption at higher levels requires an increase in disposable income or retention of purchasing power for consumers. Employment, the kind of employment, unemployment rate and duration of unemployment also plays an important role in determining the future course of consumption expenditure.
In this article, I will discuss the employment and unemployment factors that point to declining consumption in the foreseeable future. Therefore, GDP growth will be negatively impacted by these factors.
The unemployment rate in the United States has declined from a peak of 10% in October 2009 to 8.3% in July 2012. There are two major factors contributing to a 1.7% decline in unemployment rate: First, jobs created by the private sector and second, an increase in people not in the labour force. I will discuss each of these factors along with its impact on consumption.
To determine the pattern of consumption going forward, it is important to analyze the kind of jobs being created. The chart below gives the employment change for occupations with the largest employment increases from May 2007 to May 2011.The mean wages for the occupations is also provided.
According to the study by BLS -
Of the 10 occupations with the largest employment increases, only 3 had above-average wages: all other physicians and surgeons, general and operations managers, and registered nurses. The remaining seven occupations had wages below the U.S. all-occupations average of $45,230, ranging from $18,790 for combined food preparation and serving workers to $32,430 for medical secretaries.
Even the latest employment summary release shows that employment is trending up in healthcare, food services, leisure and manufacturing. Most of these sectors generate employment opportunities at a salary, which is below the U.S. all-occupations average.
The point I want to stress here is that an increasing number of Americans are taking up jobs, which have a lower annual salary. If this trend continues in the medium to long-term, the impact on consumption would be meaningful with lesser personal disposable income.
An increase in people not in the labour force is another important factor, which can negatively impact consumption.
As the chart shows, the number of people not in the labour force has increased by nearly 11 million from the beginning of 2007 to 88.3 million in July 2012.
An increase in people not in the labour force paints a relatively rosy picture when it comes to improvement in headline unemployment rate. However, it does no good to the economy and consumption.
As the next chart shows, the civil employment-population ratio is near 20 year lows of 58.4%.
Both these charts lead to the same conclusion: An increasing dependent population in the United States.
Therefore, with lower wages in full-time jobs, increased part-time jobs and an increase in population not in labour force, the per capita disposable income is bound to decline.
To add to the woes, the average (mean) duration of unemployment remains at record high levels. Duration of unemployment was at 38.8 weeks in July 2012.
A higher duration of unemployment leads to caution creeping in amongst consumers when it comes to spending.
With all these factors in mind, I am of the opinion that consumption as a percentage of GDP has peaked out in the U.S. and should start declining. This will result in sluggish GDP growth for a prolonged period.
Sluggish GDP growth for a prolonged period would mean continuation of the artificially low interest rate policy. Further, quantitative easing will be witnessed at frequent intervals. Both these factors are positive for hard assets.
I would have 15-20% of precious metals in my medium to long-term portfolio. I personally always favor physical gold or silver. However, investment through ETF's can also serve the purpose of capital and purchasing power preservation. One can consider SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) for the portfolio.
I would also be more with the producers and providers of necessity than being with the providers of luxury. I am not suggesting that there is no market for luxury anymore. On a relative basis, the former looks attractive.
In line with this, I would consider investing in two ETF's.
Vanguard Health Care ETF (VHT) - The VHT ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the health care sector. The ETF has a low expense ratio of 0.19% with highest exposure to the pharmaceuticals sector (44.9%), health care equipment (15%) and biotechnology (15%). The top five holdings of the ETF are Johnson & Johnson (JNJ), Pfizer Inc (PFE), Merck & Co Inc (MRK), Abbott Laboratories (ABT) and UnitedHealth Group Inc (UNH).
Vanguard Consumer Staples ETF (VDC) - The VDC ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the consumer staples sector. The ETF also has a low expense ratio of 0.19% with highest exposure to soft drinks (18.9%), household products (18.3%), packaged food and meat (16.8%), tobacco (16.7%) and hypermarket and super centers (11%). The top five holdings of the ETF are Procter & Gamble Co (PG), Coca-Cola Co (KO), Philip Morris International Inc (PM), Wal-Mart Stores Inc (WMT) and PepsiCo Inc (PEP).
Besides this, global diversification is always desirable and my article on investing in emerging markets might provide some insights into this.