Importance of consumer spending
Consumer or household spending is size-wise the most important component of US economic output. It makes up more than two-thirds of the total economic output. The fate of companies such as Philip Morris International (PM), Costco Wholesale (COST), and Mondelez International (MDLZ) is dependent on how much consumers are willing to spend.
Given the weak state of US exports due to a strong dollar and weak global demand, consumer spending has an even more vital role to play. It’s important to keep the US economic growth engine chugging along, now more than in the past.
What is business fixed investment?
Business fixed investment is more formally referred to as non-residential fixed investment (or NFI). It represents business spending on plants, equipment, and machines to help companies conduct their work. It forms an important component in the calculation of economic output.
It’s important not because of its quantum in total output, but because of what it represents. Falling business fixed investments indicate that companies are not investing in plants and machinery, possibly due to worries about their profitability. This could also indicate that businesses are not very confident about economic growth gaining traction and aren’t investing.
The Fed’s stance on these two indicators
In her opening remarks at the press conference after the release of the March 2016 monetary policy statement, Fed chair Janet Yellen said that household, or consumer, spending is rising at a moderate rate due to job additions and a rise in inflation-adjusted income.
But NFI was underwhelmed. She stated that “business investment has been weak, in part reflecting further reductions in oil drilling as a result of low oil prices.” It’s worth noting that growth in real NFI ventured into negative territory in 4Q15.
Consumer spending and NFI are important in light of dwindling exports. If NFI falls, it may hamper the labor market, leading to sluggish wage growth and hurting job additions. Meanwhile, investors would do well to keep an eye on consumer spending. Changes could potentially impact mutual funds such as the Vanguard Growth Index Fund – Investor Shares (VIGRX) and the MFS Growth Fund – Class A (MFEGX), which have large exposure to consumer-related stocks. ETFs such as the Consumer Staples Select Sector SPDR ETF (XLP) and the Consumer Discretionary Select Sector SPDR ETF (XLY) will be impacted as well.
Slowing consumer spending will impact inflation in the United States. Let’s look at that next.
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