Market Perspectives

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Consumption disruption in 2019?


Alive and well, the U.S. consumer was a significant contributor to domestic economic growth in 2018. Because consumer confidence and robust spending go hand in hand, what’s the outlook for 2019?

2018 marked a strong year for the U.S. consumer, whose spending confidence was bolstered by a tight labor market, rising wages, robust economic growth and the Tax Cuts & Jobs Act of 2017.

Consumer confidence likely to cool

American consumer spending accounts for about 70% of U.S. economic activity. From July through September 2018, consumer spending rose at a 4% annual pace, the fastest since late 2014. In November, the spending trend hit a snag with the measure of confidence among American households pulling back from an 18-year high, driven down by weaker expectations for the economic outlook. The Conference Board, Inc. said its index of U.S. consumer confidence dropped to 135.7 in November from 137.9 in October, which was the highest level since 2000.

Despite the decline, confidence remains historically strong and we believe it will contribute to keeping domestic economic growth on a slower, but solid pace. However, there is the potential that U.S. economic growth could decelerate further by the end of 2019 as the tax cuts benefit fades and President Donald Trump’s tariffs and trade policies take a toll.

Retail's record year in 2018

We think 2018 will go down in the record books as a great year for retail. According to Kiplinger’s latest forecast on retail sales and consumer spending in 2018, overall sales, excluding gasoline and autos, are expected to grow 4.9%, better than the 4.2% pace in 2017, and the best since 2011. Sales of building materials should advance at a more sustainable 3.7% rate, compared with a strong 8.2% in 2017. Sales of all other goods are forecast to jump 4.6% in 2018, a step up from 2017’s 3.9% and the best gain in seven years. E-commerce is likely to have another strong growth year, jumping 15%, while in-store sales are likely to be positive at 3.4%, their best showing since 2014.

Tougher year ahead

U.S. retailers are facing headwinds, including wage inflation, rising freight costs and margin dilution from e-commerce. We think it will be a tough backdrop in 2019 for many retailers to grow profit, given these headwinds, although we think there may be opportunities in what we consider defensive areas such as off-price stores, auto parts, so-called “dollar” stores and discounters. We also think there are long-term growth drivers in the e-commerce and online retail segments.

Still a good environment

While the forecast for 2019 consumption may not be as robust as 2018, we think it should still be a good environment for U.S. consumers. U.S. annual gross domestic product (GDP) growth looks to have expanded by 2.9% in 2018, close to the strongest level in 11 years. This acceleration in growth was a result of tax cuts, stronger fiscal spending and high consumer and business confidence. Our optimism about the economy wanes somewhat in 2019. We forecast U.S. GDP growth stabilizing around 2.5% with the possibility of further deceleration during the year. Fiscal stimulus is expected to continue to underpin sturdy economic momentum, though the marginal impact is likely to be modestly lower next year. We expect the boost from fiscal stimulus to fall from 0.7% in 2018 to 0.5% in 2019.

Average GDP growth expected to ease

Chart Showing Average GDP growth expected to ease

Business confidence could wane

Healthy growth in corporate profits suggests businesses have the capacity to keep investing into 2019, if they remain confident about future demand. With various measures of business confidence starting to show strain from the ongoing ratcheting up of import tariffs and retaliation on U.S. exports, the question is whether worries will translate into revised capital expenditure plans.

Keeping an eye on housing

Housing is one area of weakness that we are watching closely as consumer consumption is closely tied to home sales. The U.S. housing market remains a key weakness in an otherwise booming economy, with rising interest rates holding back demand and a slump in new construction keeping supply at bay.

When the housing market is weak it not only impacts the sale of homes, but also has the potential to discourage the purchase of major appliances, materials for home improvement projects, etc., and major brick and mortar retailers can suffer in a downturn. We believe that current weakening in housing is just a digestion period in which consumers are evaluating higher interest rates and home prices. We think it is likely to be a temporary setback for any retail activity tied to housing.

Ivy's outlook

Despite the modest projected decline in confidence in 2019 and recognition that the pace of economic growth is slowing, we think consumer and business consumption has the potential to remain strong. We believe there are plenty of reasons to stay optimistic in 2019, including a robust labor market, growing employee wages and strong overall corporate earnings.

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key takeaways

  • In 2018, the U.S. economy was bolstered by a tight labor market, rising wages, robust economic growth and tax reform.
  • Consumer confidence may cool in 2019.
  • Average GDP growth to ease in months ahead.

Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investment Management Company, are current through January 2019 and are subject to change at any time based on market and other current conditions. No forecasts can be guaranteed. This information is not a recommendation to purchase, sell or hold any specific security mentioned or to engage in any investment strategy. Strategies or securities discussed may not be suitable for all investors.

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