Greece Firestorm Won't Stifle Consumer Comeback
Allianz Global Investors
By Kristina Hooper
June 29, 2015
With so much drama unfolding in Greece, it would be easy to lose sight of the consumer revival in the United States. But don't let the latest crisis distract you from a brightening economic picture and your long-term financial goals.
Given Greece's deteriorating fiscal situation, many investors are likely to be preoccupied with the possibility of a Greek exit from the euro zone and the impact a default would have on the rest of the euro zone. And while recent developments have certainly grabbed headlines—with more to come given bank closings, capital controls and the July 5 referendum—investors may miss the quiet resurgence of American consumers.
Worth the Wait
Make no mistake: The consumer recovery started a while back with the improvement in jobs. But we're now seeing that early progress has finally begun to translate into increased spending. Many strategists and economists have been waiting since last year for Americans to loosen their purse strings. With an improving job situation and lower energy costs at work, it was puzzling that we hadn't seen a jump in consumer spending sooner. We theorized that Americans were still recovering from the Great Recession—repairing their personal balance sheets and overcoming risk aversion.
Today, it seems that Americans are finally willing to spend. In fact, we're seeing more signs that a bounce in US consumer spending is underway. In the personal income and outlays report, we saw a 0.9% surge in outlays on the strength of heavy spending on autos and retail goods. Higher spending seems to have been fueled by a 0.5% rise in personal income.
Further, the personal savings rate fell, which suggests Americans are becoming more financially stable and more comfortable with spending. What's more, the first quarter was not as bad as initially thought. In the revision of first-quarter GDP growth, consumer spending was revised up to 2.1% from 1.8%.
Adding to the evidence of a recovery in consumer spending was a substantial rebound in retail sales in May—a monthly rise of 1.2% and an annual gain of 2.7%. Meanwhile, housing is also showing signs of marked improvement. But the catalyst is not just the strengthening consumer; fear of rising mortgage rates is also a driver.
A Burst of Confidence
Not only are we seeing encouraging consumer behavior, but also confidence is picking up, suggesting that consumer spending may gain more traction. The June University of Michigan/Thomson Reuters consumer sentiment index clocked in at 96.1, above expectations and the previous month's reading.
The expectations component was particularly positive, reflecting a stronger labor market and a brighter outlook for job creation. The current conditions index was also strong, helping explain the recent improvement in consumer spending. It's also welcome news given the recent lack of expansion in the manufacturing sector, as evidenced by last week's durable goods report.
Looking ahead, investors should expect more volatility in the stock market and larger flows into US Treasuries this week given the increased likelihood of a Grexit—even if domestic data continue to be positive, including Thursday's jobs report. Still, US investors shouldn't panic. The turmoil in Greece isn't likely to have a long-term impact, particularly given improving fundamentals in the United States and the euro zone. Rather than hide, investors could view this crisis as a buying opportunity—a chance to position their portfolios for the second half of 2015.
Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree in labor economics from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
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