Solid Consumer Confidence Confirms Economic Stability: 5 Picks

On Aug 27, the Conference Board reported strong consumer confidence data for the month of August surprising many economists. Despite significant deterioration in the trade conflict between the United States and China, bond market’s frequent signal of an impending recession and a global economic slowdown, failed to deter general consumers’ sentiments.

Notably, consumer spending constitutes around 70% of the U.S. GDP while business spending generates nearly 12%. Therefore, strong consumer spending indicates that the U.S. economy, which is currently in its record 11th year of expansion, is likely to maintain momentum.

Robust Consumer Confidence in August

For August 2019, the Conference Board's measure of consumer confidence index stands at 135.1, slightly below the revised reading of 135.8 in July. August’s reading is near the 19-year high of 137.9 recorded in October 2000 and above the consensus estimate of 128.

The Present Situation Index, which gauges consumers’ views on current market conditions, climbed from 170.9 to 177.2, marking its highest since November 2000. However, the Expectations Index, which is a measure of consumers’ short-term (for the next six months) outlook for income, business and labor market conditions, declined to 107 from 112.4 in July.

Consumer Spending Remains Strong

On Aug 15, the Department of Commerce reported a 0.7% jump in retail sales in July compared with 0.3% in June and the consensus estimate of 0.2%. Notably, online retail sales rose 2.8%. Moreover, core retail sales (excluding sales at auto dealers and gasoline stations) increased 1% in July, surpassing June’s rise of 0.3% and the consensus estimate of 0.4%.

Meanwhile, on Aug 15, the Department of Labor reported that U.S. productivity (output per hour work) increased 2.3% in the second quarter of 2019, surpassing the consensus estimate of growth of 1.5%. Higher productivity will enable producers to raise workers’ pay without hiking the price of finished products. Consequently, higher wage will benefit workers raising their level of living.

The above scenario clearly shows that U.S. consumer spending has remained robust so far in the third quarter after it rebounded in the second quarter.

Tariff War Versus Fed Put

Despite several healthy consumer-centric data, escalation of tariff war between the United States and China becomes a major concern. President Trump has decided to raise tariff rate to 15% from 10% on a new set of Chinese products worth $300 billion. Most of these tariffs will be levied on consumer goods, which is likely to affect the well-being of U.S. consumers.

However, accommodative monetary stance of the Fed can help the economy to withstand trade-related disturbances. The Fed has reduced the benchmark interest rate by 25 basis points in July for the first time since December 2008. Recently, the Fed Chair Jerome Powell has reaffirmed his earlier pledge that the central bank will do whatever needed to sustain U.S. economic expansion. The market currently overwhelmingly believes that the Fed will again cut rate in September by at least a quarter percentage point. Lower interest rate will lower the cost of capital to both individuals and businesses.

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Our Top Picks

At this stage, it will be better to invest in consumer-centric stocks with strong growth potential. However, selection process may be difficult. Our Zacks Investment Research

Written By: Zacks Investment Research