Current Consumer Spending Is Unsustainable

Richard Durant profile picture
Richard Durant
4.71K Followers

Summary

  • Government transfers and COVID savings have allowed consumers to spend beyond their means, which has contributed to inflation and high corporate profits.
  • Consumers are rapidly drawing down COVID savings and will need to reduce spending in the near future.
  • This will ease inflationary pressures but will also impact corporate profits and employment levels.
  • Overall, this dynamic is likely negative for equities and positive for government bonds, although may take time to play out.

Trolley filled with groceries in wholesale store Landscape

Smile

The strength of the consumer balance sheet is commonly exhibited as a reason to expect corporate profits to remain strong and inflation to remain high. While consumer savings remain high, they are declining at a rapid pace and debt levels are

Impact of Inflation on Consumer Sentiment

Figure 1: Impact of Inflation on Consumer Sentiment (source: Created by author using data from The Federal Reserve)

Consumer Sentiment Adjusted for Inflation

Figure 2: Consumer Sentiment Adjusted for Inflation (source: Created by author using data from The Federal Reserve)

Personal Saving Rate and Consumer Loans Growth

Figure 3: Personal Saving Rate and Consumer Loans Growth (source: Created by author using data from The Federal Reserve)

Debt Service Payments Relative to Disposable Income

Figure 4: Debt Service Payments Relative to Disposable Income (source: Created by author using data from The Federal Reserve)

Savings Deposits

Figure 5: Savings Deposits (source: Created by author using data from The Federal Reserve)

Wealth Effect on Personal Consumption Expenditure

Figure 6: Wealth Effect on Personal Consumption Expenditure (source: Created by author using data from The Federal Reserve)

Durable Goods Personal Consumption Expenditure and Growth in Households

Figure 7: Durable Goods Personal Consumption Expenditure and Growth in Households (source: Created by author using data from The Federal Reserve)

This article was written by

Richard Durant profile picture
4.71K Followers
I have been managing my own investment portfolio for the past 9 years with a focus on fundamental research and deep value investing over long time horizons. My primary interest is finding early stage innovations which will create long-term value. I have a Bachelors degree in finance, an MBA and have completed the CFA and CMT exams.richarddurant.substack.com

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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