Consumer Spending, or Personal Consumption Expenditures (PCE), is approximately 70% of Gross Domestic Product (GDP). While true, the longer term trends for consumer spending are worth looking at. After WWII, PCE was about 60% of GDP, but has grown to over 68% now as shown below. Some of this was due to pent-up demand following WWII and resulting Baby Boomers and then, the prosperity of the Great Moderation during the 1980s and 1990s. It can be seen below that PCE as a percentage of GDP increased at a slower rate around the time the Technology Bubble burst in 2000.
It can be seen below that the growth in PCE as a share of GDP contributed to the annual growth rates of PCE.
During the Great Moderation, PCE increased as a share of GDP from 62% to 67%, Real Median Household Income increased from $49,000 to $58,000, and Employment as a percent of population increased from 60% to 64%. The long-term trends of all three of these are now flat or declining.
The slowing of annual growth in PCE can be seen in the next chart which is of the rolling 10-year average. Growth in Real PCE averaged 3.8% from 1960 through 2000, but only 2.0% since then.
The next chart shows demographic trends as the Baby Boomers (NASDAQ:CYAN) reach retirement age.
The following chart shows Industrial Production and Working Age Population in Japan and the United States. These two measures started slowing in Japan about 10 years earlier than in the United States. The US may maintain population growth through immigration, but industrial production has grown at a slower rate.
In addition to demographics, growth in credit markets has slowed which may mean less capital is available for investment.
The things that increased consumer spending to be 68% of GDP during the last forty years of the past decade will not be the same force over the next decade. Growth in consumer spending and therefore GDP will be slower due to the absence of these forces. Combined with high valuations, average returns are likely to be more modest over the next decade. This will likely impact pension returns and retirement plans.
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