The belief that the U.S. consumer, and the U.S. consumer led recovery, is dead is not true and does not take into consideration who really drive consumer spending in the U.S., according to Citi’s Tobias Levkovich.
Levkovich write that, while we may worry about higher oil prices and falling home prices halting the consumer recovery, the reality is that it’s the richest American’s ability to spend that matters most. And they are doing just fine.
From Tobias Levkovich:
The investment community always seems to struggle with understanding the American consumer and often appears misguided by tales of housing sector challenges and declining home prices given the misperception that US household spending is driven by real estate values. That concept has been hammered into the psyche of many fund managers even when data is less convincing. For instance, Figures 1 and 2 illustrate that the six-month change in stock prices is far more directly correlated with core retail sales activity than home prices and this reflects the reality that roughly 20% of American income earners (the higher end) account for nearly 50% of discretionary spending and own 90% of the stock market. Hence their sense of personal net worth and thereby spending potential is more deeply affected by changes in indices like the S&P 500 than the Case-Shiller home price index.
So, if stock prices have been rising, so have retail sales. Notably, this should be worrying to those predicting holiday season retail sales if our current stock price slide continues.
Further, it doesn’t appear that home prices have much to do with the retail activities of American consumers. Note the recent home price revival, compared to the slip in retail sales.
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