by Russ Koesterich, Portfolio Manager, iShares
As the iShares global chief investment strategist and a founding member of the Blackrock Investment Institute, I have the opportunity to work with world class investors throughout the firm and access their research and work, including a recent Institute paper “From Keeping Up with the Joneses to Keeping Above Water: The Status of the US Consumer.”
The paper weighs in on the debate regarding whether the US consumer can help fuel a recovery and argues that no, consumer spending is not likely to help. This is because the US consumer faces many headwinds including massive debt, a weak job market and stagnant income, not to mention the possible curbing of transfer payments as the government tries to get its fiscal house in order.
But what I found most interesting in the paper, and worthy of sharing in a quick post, was the idea in the conclusion that the US recovery today is a Catch-22.
Here’s the gist. With the consumer sector unlikely to fuel a US recovery, that leaves the corporate sector as the engine of growth. At first glance, this would seem to be a safe bet. As I mentioned in early September, the silver lining of today’s slow growth environment continues to be the strong financial position of many US companies. Corporate margins are at record highs and leverage levels are near record lows.
But here’s the catch: The domestic corporate sector relies on the US consumer. To continue growing over the next few years, companies need consumer spending to pick up. But of course, such an upswing in consumer demand is unlikely to happen in the near term because of all the headwinds facing the US consumer (think those mentioned above). This leads us to “the great economic Catch-22 of our time,” as the BlackRock paper’s conclusion describes the situation.
So, where does that leave the US recovery? One idea floated in the paper is that spending on US goods by foreign consumers could help corporations be the needed growth engine. But as the paper notes, exports are unlikely to grow enough to completely make up for lower US consumer demand. As a result, in my opinion, this problematic situation is just more evidence that the US recovery is likely to be a long slog, characterized by lackluster growth.
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