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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about the strength of U.S. consumer spending with Dustin Haygood, client portfolio manager with Aristotle Capital Management. We talked about consumer debt and current spending trends. And we started by asking what role consumer confidence normally plays in the health of an economy.

Dustin Haygood (DH): Consumer spending is by far the biggest driver of the economy. It makes up for about two thirds of U.S. GDP. So that means consumer spending and the health of the economy, they go hand in hand. They are interlinked. Consumer confidence, it’s been depressed by higher inflation over the past couple of years. Right now it’s at the lowest point since July of 2022. And consumers — according to survey results, at least — seem to feel less positive about things like job availability and their income. But despite this perception, Americans are still spending. Personal spending has increased about 3% over the last year. So, consumers might feel relatively bad, but the labour market is running hot. People have jobs and they’re going out and they’re shopping.

What accounts for spending resilience?

DH: U.S. consumers and companies locked themselves into low interest rates during Covid. So the economy is less sensitive to higher rates. Around 90% of mortgages in the U.S. are 30-year fixed-rate mortgages, so they aren’t impacted by the Fed raising rates. And the second piece of the story is strong demand tailwinds. There’s a lot of fiscal spending coming down the pipeline in the U.S. Immigration has also been particularly strong. So that supports employment growth. The Fed turned dovish this year, so easing financial conditions helps consumer spending. And 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. Baby Boomers are 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.

Favoured sectors

DH: Most sectors in the economy are going to in some way benefit from higher spending trends. We probably talk about this the most with the banks and the credit card issuers that we own. They are the ones that are facilitating that spending. There are about 70 million more credit card accounts open today than there were in 2019. And an investment catalyst, or a long-term improvement that’s taking place for a credit card issuer that we’re invested in, is that we think that company will continue to gain more share of larger spenders. Excess savings has started to rise again for higher-income households and that could be a tailwind. 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. Another area we’ve done research on is the travel industry. Travel in the U.S. is back near 2019 levels. People, they’re going on vacation. But what’s not back just yet is business travel. If business travel ramps back up that would also be positive news for the leisure and hospitality industry more broadly.

Labour markets

DH: It’s still hard for many companies to find workers. Baby boomers are retiring at a faster pace than younger people are entering the workforce to replace them. That could mean that there is a structural undersupply of labour in the U.S. More and more businesses are realizing this and they’re responding by upping their spending, particularly on technology to increase both the manual and the mental productivity of their available labour force. The ongoing widespread adoption of AI, that’s an example of this. So if there is a boom in productivity over the next decade, that’s something that could put a cap on inflation long-term and also allow real wages to increase.

And finally, what’s the bottom line for investors?

DH: Consumers as a whole still 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. So it’s possible Americans will return from their vacations this summer, become concerned by the balances they’ve racked up on their credit cards, and decide to cut back. But it’s also possible they stay employed, their real wages grow, their purchasing power increases, and they just keep shopping. And that would mean only good things for the U.S. economy.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Dustin Haygood of Aristotle Capital Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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