August reinforced the perennial fear of this recovery: insufficient growth. While the economic data has started to stabilize, the global economy, particularly the manufacturing sector, remains fragile. However, for the umpteenth time this recovery, the U.S. household sector appears to be keeping the global economy out of the abyss. The good news: This is likely to continue.
A robust consumer, along with relentless cost cutting and a shift towards more profitable services, has led to record levels of profitability for consumer discretionary companies. While some segments, notably department stores and select specialty retailers, are struggling, the overall sector is in exceptionally good health. With a return-on-equity (ROE) of 28%, the consumer discretionary sector is second only to technology in terms of profitability.
None of the above suggests that the U.S. consumer is bullet proof. The aggregate numbers mask significant differences by household, a function of widening wealth inequality. To the extent less of the wealth and more of the debt is held by lower and middle-income households, this may suggest a lower propensity to spend than suggested by the headline numbers. That said, recent data suggests that some of the best income gains are concentrated in lower income households. All of this suggests that, once again, it is probably a mistake to bet against the U.S. consumer.
Russ Koesterich, CFA, is a Portfolio Manager for BlackRock’s Global Allocation Fund and is a regular contributor to The Blog.
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