“Isn’t the consumer dead..?”


“American households have shifted their cash flows from illiquid real estate and consumer durables to paying down mortgages and consumer debt…It is this rapid rise in aversion to illiquid risk that explains a large part of the anaemic recovery in the US.” Greenspan



DRIVER OF REVIVAL: The US consumer has historically been a crucial driver of economic renewal

PRECARIOUS POSITION: Many worried about employment, have under-saved for retirement

STIFFLED STIMULUS: The propensity to spend (and boost the economy) will be limited




The importance of the consumer and the concerns surrounding the structural headwinds they face are undeniable. Consumer spending accounts for approximately 70% of US GDP (although I’ve read an interesting piece by Darren Marron arguing this figure is actually nearer 60% when spending on imports are dealt with more appropriately[1] but nevertheless, this is still a significant percentage). The magnitude of the problem has been well described by John Maudlin who pointed out that versus the last recession, we have seen “double the asset deflation, triple the job loss, coupled with a collapse in credit.” It doesn’t look likely that the consumer will be bouncing straight back!


Conference Board Consumer Confidence Index down 57% since 2007. Source: Bloomberg


On the subject of unemployment, although it is universally monitored, what has been missed by many is what the rate does not take into account. Salaries have been cut and working hours reduced. This adds to the misery of many consumers. Furthermore, it is these people who are working part-time that will be hired back into full-time employment before companies reach out to the many unemployed. This must be assessed within the context of an expanding labour force where a substantial amount of new jobs are needed every month in the US.


Looking forward, another key limiting factor on the consumers’ propensity to spend is the move to save instead, as they look to fund their retirement / non-wage earning years. The “Baby Boom” generation is expected to account for nearly 60% of net US wealth by 2015, according to a study by McKinsey,[2] and their turnaround from spending to focus on saving will be magnified by the fact that they have historically under-saved. The aforementioned report identified that as low as only 25% are “financially prepared for retirement”, thus the decrease in the spending habits of the vast majority will be significant.  Inside Europe the story isn’t much brighter and the UK pension gap (the difference between the income needed to live a comfortable retirement and the actual income individuals can expect from their current pensions) has been heralded as the “biggest in Europe”[3] by national papers. The OECD sets an average pension at around 59% of the earnings built during a full working career, a stark comparison with the UK’s 31%[4]. With relatively small public pension, an individual will need to make extra savings to ensure their standard of living does not drop dramatically as they move into retirement. This is not an outlook that will encourage the spending that will boost or even support the economy. (For a deeper insight into the ageing populations of the developed world see What is a \”Structural limitation to growth\”? How can I exploit it?)



Savings Rate, US. Source: McKinsey Global Institute analysis


ECONOMIC IMPACT: This points to a muted recovery instead of a “V” shaped bounce-back.

INVESTMENT INSIGHT: Look at companies which aren’t as heavily reliant on the Developed Consumer but with an international reach and operations within Emerging Markets. To exploit the ageing of the “Baby Boomers” within Developed Markets, see What is a \”structural limitation to growth\”? How can I exploit it? and invest in companies positioned to benefit from an increased reliance on healthcare, nursing homes etc.





  1. Very interesting… although I was walking down Oxford street earlier today and there there were many Americans and Europeans enjoying the high end retail stores. Perhaps it is because the pound is weak or because the power of advertising and a generation of “must haves” continues to make us buy into the big brands.

  2. Thank you Wayne for your post.

    In answer to your comment, I would like to make 3 points:

    1. The relationship between currency and retail sales seems to be circular
    2. Retail sales are poor and consumer confidence may be to blame
    3. The disparity between appearance and reality – “window shoppers”

    You have made a very INSIGHTful comment and the relationship between currencies and retail sales is an important one. At beginning of December 2008 the Telegraph announced that “Britain’s recession likely to trigger boom in foreign Christmas shoppers”. [1] And indeed by mid-January 2009, the same paper published an article claiming that the “weak pound (was) help(ing) foreign shoppers give a lift to eurostar” [2] whilst the Mail reported “London-listed luxury dealer HR Owen said it had noted a “significant” increase in purchases by foreigners in the last three months as sterling has slumped against the euro”. [3] However since this time, sterling has strengthened almost 9% against the euro and ~15% versus the dollar and the volatility in these markets is at a heightened level.

    Furthermore, the relationship between the currency and retail sales seems to be a circular one. Last month, on September 17th, sterling appeared to fall in reaction to the release of weak UK sales data which brings me to my next point – the fundamentals tell us retail sales are poor and consumer confidence may be to blame. The British Retail Consortium brought out a report this month with the headline “September 2010: Sixth month of poor (retail) sales growth” [4] and its Director General admitted there has been “weak demand (and) poor consumer confidence” in a following article. [5]

    Therefore, your recent experience may be a great example of the disparity between appearance and reality – I wonder how many of those you saw were “window shoppers”? As an aside, I would be very interested to know if the multitude of foreign shoppers you saw represents an influx or a certain level of foreign interest that our fair capital consistently attracts?

    Great discussion point!

    Thank you again

    Any further thoughts, suggestions or comments on this topic (or any other) are welcome…

    [1] http://www.telegraph.co.uk/news/uknews/3536468/Britains-recession-likely-to-trigger-boom-in-foreign-Christmas-shoppers.html
    [2] http://www.telegraph.co.uk/finance/financetopics/recession/4227549/Weak-pound-helps-foreign-shoppers-give-a-lift-to-Eurostar.html
    [3] http://www.dailymail.co.uk/news/article-1127188/Foreign-shoppers-flock-London–buy-cheaper-luxury-cars.html#ixzz12EmJ3ceQ
    [4] http://www.brc.org.uk/details04.asp?id=1808
    [5] http://www.brc.org.uk/details04.asp?id=1807

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