In the period prior to 2007-08, US GDP growth was largely fueled by the housing boom and robust consumption. Seven years later, consumer confidence is at multi-year highs but consumption is unlikely to boost US GDP growth in the coming years. This article discusses the reasons why consumption will remain subdued. In line with this assumption, I am also of the view that US GDP growth will remain subdued even when the economy continues to grow at a moderate pace.
The first point that I want to focus on is the impact of expansionary monetary policies on the real economy and the household sector. There is no doubt that expansionary monetary policies prevented the collapse of the financial system and also provided support to the housing sector. However, in terms of impact on real economic activity and impact on households, expansionary monetary policies have been a failure.
The supplemental nutrition assistance program (NYSE:SNAP) is a good indicator of the failure of expansionary monetary policies to provide support to the household sector. SNAP benefits are provided to people with very low household incomes and the number of people receiving SNAP benefits has increased from 26.3 million in 2007 to 46.5 million in 2014. In other words, one out of seven US residents is receiving SNAP benefits and this is a clear indication of a struggling household sector.
The important point to note here is that the federal spending on SNAP amounted to $76 billion in 2014 and according to the CBO, several policymakers have expressed a desire to significantly reduce SNAP benefits. While this can help improve the government's balance sheet to some extent, lower allowance for eligible SNAP participants would imply further impact on consumption spending.
Other data that points to an end to the consumption boom is the number of people not in the labor force. As of April 2015, the people not in the labor force was 93 million and this implies that one out of every 3.5 Americans is not in the labor force. If per capital consumption is to remain robust, the working population needs to work more and earn more to offset the sharp decline in the labor force. However, wage growth remains a concern seven years into the crisis.
I must add here that the healthcare sector has supported growth in terms of spending and jobs creation. I expect this to continue due to demographic factors and the broad consumption spending will remain steady, but at lower levels in the coming years. However, discretionary spending is likely to remain weak considering the above factors.
In a recent Bloomberg article, Federal Reserve Bank of Atlanta President Dennis Lockhart also voiced concerns on weak consumer spending. According to Lockhart:
Consumers seem to be behaving cautiously in most categories of spending... Recent consumer behavior is something of a puzzle...
In my view, the above two points largely explain the consumer spending pattern along with the point that consumers are looking to save in an environment where economic activity still seems uncertain.
From an investment perspective, weak consumer spending can translate into weak GDP growth and another reason for the Fed to delay a rate hike. While recession can take equities lower, relatively sluggish economic activity can be positive for equities (NYSEARCA:SPY) as near-zero rates sustain. I also remain bullish on the healthcare sector from a long-term portfolio investment perspective and the Vanguard Healthcare ETF (NYSEARCA:VHT) provides broad exposure to the sector. As a part of risk diversification, I like the Vanguard Long-Term Corporate Bond ETF (NASDAQ:VCLT). The corporate bond ETF has experienced strong fund inflow in the recent past and I expect further attraction towards this investment option.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.