Over the holidays, I had the pleasure of traveling with my family through some of Europe’s most scenic and picturesque countries. We immersed ourselves in the history and culture of The Netherlands, Germany, Belgium, Switzerland and Austria, checking off such experiences as standing in the shadow of The Matterhorn in the Alps, walking around Munich’s Marienplatz during Christmas and other cultural pleasures.
And while we enjoyed every minute of our trip, I was struck by the difference I was seeing between Europe and the United States. Much more than the culture; it was the pace of society. Missing was the energy of the American economy, particularly that fueled by hungry consumers.
It was no more evident than the day after Christmas in Munich as we set out to do a little shopping. They must have great after Christmas sales, right? But surprisingly, all of the shops including the renowned Christmas Market were closed. What was open? Starbucks. The Munich Starbucks is one of the largest in the world, and they were busy, or so it seemed. The huge facility was packed with people socializing and relaxing. No one was in a hurry.
Contrast this with your typical Starbucks experience in the States. Customers rush in, grab their favorite coffee and get on their way to their next destination. Americans always seem to be working.
According to a Pew research study, Americans’ emphasis on individualism and work ethic stands out in surveys of people around the world. In that study, 57% of Americans disagreed with the statement “success in life is pretty much determined by forces outside our control,” a higher percentage than most other nations and far above the global median of 38%.
As a financial advisor, I make it a point to stay on top of the European economy. It has been struggling and near recession for months. There are finally signs of a recovery that could represent compelling value in terms of investments, but they still don’t have the same consumer economy that we enjoy in the United States. Unemployment is higher. Interest rates are negative. And optimism just hasn’t been as prevalent as it is here. Why does this matter?
Consumer spending is a large component of GDP. In fact, it is a leading economic indicator. That's because consumer spending accounts for roughly 70 percent of U.S. economic growth -- that amount has increased considerably, from 59.5 percent of the economy in 1969 to 68.1 percent of GDP in the third quarter of 2019, according to the Federal Reserve Bank of St. Louis.
With consumer spending making up a significant part of U.S. GDP, it makes it one of the biggest determinants of economic health. Data on what consumers buy, don’t buy, or want to spend their money on can tell you a lot where the economy may be heading. While our economy is slowing in some aspects (manufacturing), consumer confidence and retail spending remain strong. Watching trends in consumer spending can also serve as an important tool for managing your investments.
It was comforting to see that American consumer spending remains strong when we returned from Europe. As we move forward in 2020, we know there will be global economic challenges. Our Chief Investment Officer, Michael Aroesty is keeping a close eye on the current economic cycle for any warning signs of recession. But in America, those fears appear to be lessening in large part due to consumer confidence. Because we are a country that is always making and selling “stuff”, the consumer continues to lead our economy forward.
Thanks for reading,
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David B. Root, Jr.