• Healthy households are a major positive for the economy
  • Consumers are generally employed, wealthier, and increasingly confident
  • Income growth, a key driver of spending, is on the rise

Consumer sentiment has reached its highest level in 16 years, and a quick look at American household fundamentals helps explains why. The jobless rate is now below its prerecession low and likely to fall further. Meanwhile, household net worth is at an all-time high, debt has been reduced, and rising housing prices have pulled millions of homeowners out of negative equity.   Perhaps the best news though has been the rapid rebound in household income over the past few years.

The Census Bureau recently reported that real median household income increased in 2016 for the fourth consecutive year and now stands at its highest level ever. Longer-term gains are even more impressive, especially considering average household size has gradually declined over the last 50 years (see chart). The typical household today has an annual income $14,144 greater than in 1967 – that’s almost $1,200 every month for fewer people.

3Q17-Single Denike Chart 1 - 400px

And it’s not just the wealthy who are benefiting from the current economic expansion anymore. Recently, those on the lower end of income distribution have seen their income gains outpace those on the higher end—a continuation of a long-term trend in upward mobility that has unfortunately gone underreported. Yes, the “middle-class is disappearing,” but it’s because households are gradually moving up into higher income groups, not down into lower ones (see chart).

Not all the news is good. The aftereffects of the Great Recession included many years of income stagnation that cannot be made up, and a good part of recent gains have come because Americans are working harder and longer rather than experiencing significant wage growth. Many families also are now having to rely on more than one breadwinner to get ahead. Still, from a broader perspective, the average U.S. household is in better shape today than it’s been in a very long time

When asked about our positive outlook for the economy, we point to the consumer sector.  The extent of the U.S. economy’s dependence on the consumer for growth is difficult to overstate. Personal household consumption accounts for nearly 70% of U.S. GDP, a figure that’s more than 10% higher than the average for other developed countries. Or, put another way, as long as the U.S. consumer continues to do well, the U.S. economy should too.

3Q17-Single Denike Chart 2 - 400px

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors, as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy, and market risk. Investors in MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Income Tax).

There are inherent risks with fixed-income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed-income securities and during periods when prevailing interest rates are low or negative. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in below-investment-grade debt securities, which are usually called “high yield” or “junk bonds,” are typically in weaker financial health and such securities can be harder to value and sell, and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

Investments in emerging market bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging market bonds can have greater custodial and operational risks and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk. Past performance is no guarantee of future performance.

Index Definitions

The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a nongovernmental organization, which determines the value of the index from the values of ten key variables.

The Goldman Sachs Financial Conditions Index (GSFCI) is a weighted sum of a short-term bond yield, a long-term corporate yield, the exchange rate, and a stock market variable.

The Standard & Poor’s (S&P) 500 Index represents 500 large U.S. companies. The comparative market index is not directly investable and is not adjusted to reflect expenses that the SEC requires to be reflected in the fund’s performance.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.