Sunday, March 10, 2013

Economy: Power To The People

It looks like the economic upswing in the U.S. is gathering speed. At least the engine of the economy, the consumer spending (around 2/3 of the economy), is getting more and more power.

The consumer spending is especially powered up by the healing job market. Last Week we learned that employment in the U.S. rose 236.000 in February, the jobless rate dropped on a four-year low and the (4-week average) of jobless claims fell on a five-year low (bloomberg). More jobs mean more incomes available to spend (income effect). The healing job market also reduces the risk of losing ones job. The  improved job security could encourage consumers furthermore to allow themselves to spend more money for discretionary goods & services like cars, furniture, travels and restaurants.

But the rising employment isn´t the only power source for the upswing. There are 2 more positive impulses:

1. The recovering home market which leads to rising prices for one family houses (plus 9.7% year-over-year calculatedriskblog) is lifting the wealth of the homeowners. Experience shows that people spend more money if they feel wealthier (wealth effect).

2. The rising stock market creates another positive wealth effect. The S&P 500, the gauge for the U.S. stock market, climbed last week to a five year high. U.S. Stocks gained 13% in the recent 12 months and 129% since 3/9/09, the start of the recent bull market (bespokeinvest). Gains on the stock market plus rising dividends deliver an additional incentive to spend more for consumer goods & services.

In turn the rising consumer spending will lift the company profits and hence animate more hiring and fuel more gains on the stock market.  It seems that everything - jobs, income, wealth, consumer spending - is working together in a positive way. 

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