The consumer is the major driver of the U.S. economy

The labor market and consumer confidence remain bright spots for the U.S. economy, but other economic indicators are raising market fears of a U.S. recession. The consumer remains the major driver of the U.S. economy and we believe their relative health is sufficient to avoid recession in the near term, particularly in concert with support from U.S. fiscal policy.

Last week’s data did little to calm market fears, with industrial production declining 1.75% for the past year, the first year-over-year decline since the financial crisis. Industrial activity appears to be under stress, especially from the near depression in the mining and energy industries. Credit spreads are at distressed levels and the mining and energy industries appear to be entering a period of bankruptcy and recapitalization.

In our view, declining investment and falling employment are important factors needed to help stabilize energy prices, which should aid transition in the energy and mining industries. Inventories for the broader economy have been declining and the month-over-month pace of weakness in industrial activity seems to be slowing, possibly indicating industrial contraction may be nearing its conclusion.

Retail sales were disappointing for December, declining 0.1% for the month, despite the tailwind of lower food and energy prices. However, for the full year, retail sales grew 2.2%, despite a 40% decline in oil and gasoline prices, and are in line with income growth. Savings rates have risen along with the decline in prices, improving consumers’ balance sheets. Consumer preferences appear to be shifting to experiences over goods, which makes historical comparisons a little more difficult. With labor force participation stabilizing and a low unemployment rate, wage gains, along with job gains, should provide for continued consumption growth.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment.

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