Ignore the Headlines: U.S. Consumer Doing Fine

Roland Czerniawski: In today's video, we are going to take a look at consumption data in the fourth quarter. Quarterly consumption was up 3.1% year over year in the fourth quarter when adjusted for inflation, which is considerably faster than the 2.4% average during the past three years. 

Let's dissect the report and look at the specific categories that contributed to the overall growth to see where the improvements are actually coming from. The chart depicts various consumption categories represented as varying-in-size bubbles. The vertical axis represents the year-over-year growth, while the horizontal axis represents the dollar size of the categories. The size of the bubbles represents the contribution to the overall growth defined as year-over-year growth times the dollar weight.

From the chart, we can see that healthcare was the biggest contributor to the consumption data in the fourth quarter when analyzed on a year-over-year basis. It is the second-largest category after housing and utilities, and because of our aging population, Americans continue to spend more on healthcare almost every quarter. 

The largest category, housing and utilities, did not grow as fast as healthcare despite its large size due to the fairly limited growth in new construction and warmer weather, which decimated consumption of utilities such as gas and electricity. Other categories that were big contributors were other nondurables (which includes products such as prescription drugs, house supplies, and tobacco) and recreational goods, which includes electronics. Restaurants and hotels also benefited from increased consumption, as warmer weather encouraged more people to get outside and explore.

Categories that did not do particularly well, beyond the already mentioned utilities, were clothing (which took a hit from warmer weather and lower winter-apparel sales) and financial services (most likely because of the recent volatility in the financial markets).

Overall, fourth-quarter real consumption came in slightly weaker than expected, but the report also contained signs of strength. Many consumer-discretionary categories that are indicative of consumers' short-term sentiment did well, while others influenced by outside factors such as poor utility sales and financial services lagged behind. 

Investors should be aware that, despite some negative headlines, U.S. consumers continue to spend, and will continue to be the growth engine of the U.S. economy in 2016.