Middle-Income Consumers Step Out

Brian Selzer

OCEAN CITY — Consumer spending was a bright spot in the otherwise lackluster first quarter GDP report, rising 1.9% annualized from the fourth quarter. In fact, the two biggest detractors from overall economic growth — low energy prices and a stronger U.S. dollar — have provided a big boost to consumers.

We’re seeing early signs of a recovery for American consumers, bolstered by improvements in hiring, housing and the stock market. They remain the bulwark of the economy, comprising roughly 70% of GDP, and they appear to be better positioned to lead the country out of its winter doldrums.

Most encouraging of all, perhaps, is the recent pickup in spending is being driven by the middle-income consumer.

Since the financial crisis, growth in retail sales has improved considerably as the ability and willingness of consumers to spend have risen. Arguably the biggest driver of spending has been the improving labor market. The number

of new hires moderated in March, but that followed solid gains of more than 200,000 per month for a full year. As a result, the unemployment rate has fallen to 5.5% from 6.6% in March 2014.

Wage growth has certainly been subdued, but given the low-inflation environment, consumers’ purchasing power is increasing. The advantage doesn’t come only from cheaper gasoline; the stronger dollar is making imported goods less expensive.

Consumers may have started the year timidly, opting to keep more of their paycheck in the bank. The savings rate climbed as high as 5.7% this year, even as real disposable income rose the most since 2012. However, we attribute this more to seasonal factors, and the BofA Merrill Lynch (BofAML) U.S. Economics team forecasts a rebound to 4.0% growth in real spending next quarter as warmer weather brings out the shoppers.

Alongside the improving job market, the housing market is picking up and stocks continue to rise, fortifying household balance sheets. Rising home prices, nationally, have helped

consumer confidence. This particularly benefits the middle class, as houses make up a bigger percentage of their overall net worth, according to BofAML Global Research.

Stronger balance sheets are one reason consumer confidence has risen in the past year, and why we believe spending will continue to rise.

Bank of America’s data on its cardholders shows some promising trends relating to consumer spending,

particularly in the middle-income segments. Sales of items other than autos and gasoline rose at a 6% annual rate in March, compared to 1.4% at this time last year. The data showed that sales at home goods stores and at dollar stores grew briskly. In addition, spending continued at fast casual and at quick service restaurants.

BofAML Global Research’s consumer team highlights other signs of improvement in middle-income consumer spending. For the first time in several years, sales of homes priced between $250,000 and $500,000 are outpacing those at $1 million-plus. In addition, spending on leisure travel has jumped as households take advantage of the stronger dollar and lower fuel costs, with economy lodging outpacing higher-end chains. According to the team, luxury hotels outperformed the economy segment from 2010 to 2013 due to strength in business demand. However, higher-end hotel chains are experiencing some moderation, while less expensive ones have strengthened in the past 12 months.

(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)

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