2017, So Far, Has Been A Great Year For Non-Durable Good Consumption

by: Eric Mason

Summary

The pace for 2017 real per capita consumption of non-durable goods in the second quarter came in at $7,883.

Through the first half of 2017, non-durable consumption is on pace to finish up 1.9%.

The U.S. economy has seen 20 straight quarters of year-over-year pace increase in non-durable good consumption.

The purchasing of non-durable goods has climbed to an all-time high, and that is a great sign for the economy.

Non-durable goods are anything that is purchased and consumed in the short term. This includes such things as food, gasoline, and toilet paper. Basically, if the good is only around for a short time, less than a year, before being completely consumed, it is a non-durable good. Non-durable goods occupy an important place in macroeconomic indicators because they are one of the first major indices to signal a coming contraction. It is also an index that shows the beginning of recoveries before more commonly referenced consumption indices do.

One of the benefits for investors looking at non-durable good consumption is that these goods are rarely financed. House sales, auto sales, and durable good consumption are all important economic benchmarks to follow, though they may lag behind economic changes because those goods are traditionally financed. Financing goods can blur consumption because this relies heavily on the consumers’ confidence in their future income. Non-durable good consumption relies more on a combination of current income and future income confidence.

By investigating non-durable good sales, we are going to be able to distill a proxy for consumer confidence and demand.

The first macroeconomic indicator that we are going to discuss is Real Personal Consumption Expenditures: Nondurable Goods. This data and all data we’ll use come from the Federal Reserve Economic Database (FRED). This seasonally adjusted data series converts the nominal consumption of non-durable goods into a data series that factors out inflation, which is what makes the series a real data set. We are comparing apples to apples, over time.

As we can see in the above chart, real consumption of non-durable goods in the second quarter of 2017 is the highest level we have ever seen. The second quarter of this year saw non-durable good consumption reach a pace of $2.56 trillion. That is a $46.8 billion pace increase from the second quarter of last year, which is a 1.9% increase. While a near 2% increase may seem mundane, at this scale, we are dealing with economic convergence which can be summarized as large economies have smaller growth rates than small economies. When we discuss indices that are measured in the thousands of billions of dollars, we have to frame the growth rates keeping in mind that even minuscule growth requires a massive increase in consumption. This increase in consumption, though it seems small, signals that consumers are more confident in their income today than they were at the same time in 2016.

In order to achieve this better perspective, we are going to use the data set Real personal consumption expenditures per capita: Goods: Nondurable goods. It is the same data as that of the previous series, except on a per capita basis. This will show us how U.S. consumers are individually consuming.

This post-recession growth has led to 2017 currently pacing for the highest expenditures we have ever seen for per person consumption of non-durable goods. People are buying, and they are buying at record levels. The pace for 2017 real per capita consumption of non-durable goods in the second quarter came in at $7,883, up 1.2% from the second quarter of 2016. This growth represents not just a new high but the culmination of 20 straight quarters of growth in this indicator. Because these observations are in real terms, we know this growth in consumption is not just from inflation.

Seeing new growth in real per capita consumption of non-durable goods carries the important conclusion that consumers are buying more and not just buying enough to replace what they previously consumed. This difference between replacement and additional consumption is what makes the conclusion from this index so important to firms and investors. That difference is new demand. We are not just seeing consumers buying to maintain a lifestyle; instead, they are increasing their expectation of that lifestyle itself. This bodes well for all retail and manufacturing firms.

We can add another level of understanding to this analysis by looking at the consumer price index for non-durable goods. Until now, we have only talked about consumption of non-durables in real terms. While real terms are great for comparing the value of one-time period and another, looking at the CPI allows us to identify how prices are changing and trending over time.

As we look at how the prices of non-durable goods have changed over the last 10 years, we see that 2017 have been an exceptionally stable year for inflation in this index. Since the beginning of 2017, inflation in non-durable goods has averaged -0.31%. Despite this decrease in inflation in 2017, we are still seeing an all-time high pace in consumption of non-durables. This leads us to the conclusion that, when coupled with the per capita data, consumer demand is outpacing the general price level rise. Whenever we see growth that is outpacing inflation, this translates to additional operations for firms that produce and sell non-durable goods, like Exxon Mobil (NYSE:XOM), Amazon (NASDAQ:AMZN), and Coca-Cola (NYSE:KO).

If we take into consideration these three macroeconomic indicators here, what we see is an incredibly strong and robust economy for non-durables. Consumers are demanding more goods than they have ever been. When we see new growth like we are seeing today, even bearish market watchers must acknowledge that the current state of non-durable good sales signals a sturdy and stable economic message. The growth we are seeing in non-durables is consistent with consumers articulating that they wish to continue the trend of the last 20 quarters, which is growth. Investors should take solace in knowing that consumers appear more than happy to continue their increasing level of consumption. With increased demand and consumption, investors have many reasons to be optimistic.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.