As the United States celebrated its 243rd birthday this Fourth of July, we had something extra to celebrate. The current economic expansion became the longest in American history. As of July 1, the U.S. economy has been in expansion for 10 full years,1 eclipsing the old record achieved between 1991 to 2001.
Longevity has its merits, but the longer an economic expansion continues, the more natural it is to wonder when it may end. This is especially true in the current environment considering the added uncertainty of rising trade threats. The trade dispute between the U.S. and China has already had a negative influence on global economic growth over the last year. A further escalation would create additional challenges to the economy’s 10-year winning streak.
The U.S. economy, however, currently enjoys an unusual, yet key source of support that we believe provides a considerable defense against recession prospects—the “new” American consumer.
The “new” American consumer
Consumers play a key role in determining the direction of the U.S. economy, accounting for approximately 70 percent of all economic activity.1 Historically, however, this deep into an economic expansion, consumers tend to be more financially vulnerable, having taken on too much debt while times were good. Eventually, debt burdens become too severe, forcing households to slow their spending. What often happens in this type of environment is that businesses react by shedding workers and pulling back on their own spending. In these circumstances, the next recession is often born.
That has not been the pattern this time around. Today, we’re in an era of a “new” American consumer. Gone are the materialistic days of the 1980s, the internet mania of the late 1990s, or even the “riches through real estate” philosophies of the housing bubble in the early 2000s.
Changes in attitudes
Since the Great Recession ended in mid-2009, consumers have taken a much more conservative stance in their spending habits and personal finances than was the case in prior decades. We all know how the Great Depression of the 1930s caused our parents or grandparents to be much more cautious in their approach to money. The Great Recession of 2007–2009 had a similar influence on all of us, though certainly not to the same magnitude.
Nowhere is this more evident than in the pattern of consumer debt relative to income. Since the start of 2009, total consumer debt has increased by $1 trillion, to $13.7 trillion, according to data from the New York Federal Reserve. Total personal income, meanwhile, has grown nearly six times faster, by $5.8 trillion, to $18 trillion, according to the Commerce Department. Not surprisingly, the personal savings rate has also been relatively high, meaning consumers are saving more of their income rather than spending it.
We should also note that the U.S. financial system is in strong condition, in our view, and U.S. companies are well positioned to continue generating solid profits. Corporate balance sheets, while not without pockets of weakness, are generally in good shape as well.
The boat is strong, but the seas are rough
Although we believe the U.S. economy currently sits on a solid foundation, a significant escalation of the U.S. /China trade dispute and other potential trade tensions could place considerable pressure on the economy. In this case, solid consumer finances might not be enough to prevent a recession, but they should improve the chances that any economic setback will be mild.
As with nearly everything in life, no one can predict the future, economic or otherwise, with guaranteed accuracy. However, in our view, there is no better way to increase your odds of a positive economic outcome than to step into that future with your personal finances in sound condition. Talk to your financial advisor about where you stand. If the economy should face troubled waters, make sure your current investment portfolio is appropriate for the level of market unpredictability you are willing to endure.