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Even as high interest rates cause turbulence in some sectors of the U.S. economy, strong consumer spending has created powerful tailwinds, says Dustin Haygood, client portfolio manager with Aristotle Capital Management.

Haygood said the financial industry in particular stands to benefit from a resilient consumer culture.

“Most sectors in the economy are going to, in some way, benefit from higher spending trends. We probably talk about this most with the banks and the credit card issuers that we own,” he said. “They are the ones facilitating that spending.”

Haygood said there are about 70 million more credit card accounts open today than there were in 2019. Gaining an increased share of larger spenders is top priority for credit card companies and banks — and it’s an economic catalyst investors are paying attention to.

Even increasing savings could spell gains for banks, he said.

“Excess savings has started to rise again for higher-income households and that could be a tailwind,” he said. “There are also banks we own that have a high percentage of fee-based income, and a big portion of that is credit card processing. So those banks could benefit as well.”

Haygood said consumer spending is the biggest driver of any economy. In the U.S., it makes up about two-thirds of the national GDP.

“That means consumer spending and the health of the economy go hand in hand,” he said. “They are interlinked. If consumer spending is strong, typically that means the economy is also strong and vice versa.”

Consumer confidence, on the other hand, has taken a hit in recent years with higher inflation and growing anxiety over job availability and income stability.

“Despite this, Americans are still spending. Personal spending has increased about 3% over the last year,” he said. “Consumers might feel relatively bad, but the labour market is running hot, people have jobs and they’re going out and they’re shopping.”

Haygood said several factors explain the strong consumer backdrop in the U.S. For one thing, both consumers and companies locked themselves into low interest rates during Covid, leaving the economy less sensitive to higher rates. Fiscal spending was dramatic and prolonged, injecting billions into the economy. And immigration has been particularly strong in recent years, supporting employment growth.

The Fed’s more dovish position in recent months, with the suggestion of lower interest rates to come, has also helped consumer spending. And U.S. household wealth is at a record high of over $150 trillion.

“While the personal savings rate has fallen more broadly, that could be because baby boomers are spending their retirement funds and no longer have earnings to save,” he said. “They’re spending heavily on labour-intensive services like restaurants, travel, entertainment, and that’s boosting labour demand and the incomes of the new workers in those industries.”

While some economists have expressed concern at growing consumer debt, now at a record high of about US$17.7 trillion — US$5.2 trillion in outstanding consumer credit on top of the US$12.5 trillion in household debt — Haygood said the consumer debt-service ratio  is below 10%, near historic lows.

“Sure, consumer debt has increased, but it hasn’t grown much faster than consumer income,” he said. “As a percentage of disposable income, it’s about 25%, which is right around levels typical of the past 20 years or so.”

Haygood concludes that consumers as a whole seem to be on decent footing.

“They’ve been supported by the strong labour market and in some ways, they’ve also been shielded from the impacts of higher interest rates,” he said.

Haygood said Americans could wake up from their spending spree and become concerned by the debts they’re accumulating.

“But it’s also possible they stay employed, their real wages grow, their purchasing power increases and they just keep shopping,” he said. “And that would mean only good things for the U.S. economy.”


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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