Sunday, December 07, 2008

A Look At The Consumer

(I published a version of this article on The DIV-Net website on November 30, 2008)

The largest contributor to GDP growth in the U.S. is the consumer. The consumer accounts for nearly 70% of GDP and so goes the consumer so goes the U.S. economy. A reason for investors to keep tabs on consumer economic data is the data can provide a clue as to a potential turnaround in economic growth.

As the below chart notes, U.S. GDP has grown to over $14 trillion. At the same time, consumer debt has grown to over $14 trillion as well. The average level of consumer debt going back to 1953 is only 53%. The issue here is consumer debt has fueled a large part of the economic growth in the U.S. Since early 2007 though, consumer debt has begun to decline as a percentage of GDP.

(click to enlarge)

Consumers certainly need to live more within their means. However, with consumers finding more difficulty accessing the credit markets and continuing to reduce debt, what does this mean for the economy when it comes out of the recession?

Another economic variable investors can track to gain some perspective on the consumer is the Personal Consumption Index (PCE).

(click to enlarge)

Source: New York Times

The PCE measures the average price change for all domestic personal consumption. Updated data on the PCE Index can be found at the St. Louis Federal Reserve Bank economic data site.

So if consumer spending is potentially constrained in the next economic recovery cycle, it will be important for investors to invest in those firms that demonstrate they have the ability to grow earnings in the future. Evaluating the dividend practices of companies is one way to gain insight into a company's prospective earnings potential.

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