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Consumption's Revival or Requiem

The equity markets in the US are welcoming a new president, for whom regulations and taxes are anathemas, by rising at an unprecedented rate since the election. There is no question that lower costs and reduced tax burdens increase their earnings. While high valuations pose a threat and a rising US dollar could impair foreign earnings, the larger concern is the demand side. The economy stands at new highs in employment, while unemployment levels are at the cyclical trough. Regaled as the new Reagan who will return America to former greatness, Trump will test his prodigious business acumen delivering further growth from a cyclical peak. President Reagan was fortunate to have demographics, low debt, low equity markets, and real wage growth as a tail wind. President Trump will find these forces conspiring against him as he seeks renewed greatest in America.

Consuming America. The American economy is dependent on domestic consumption for growth due to its sheer size in gross domestic product (GDP). Consumption has driven growth over the last few years with intermittent support from investment. With the various cuts to Federal spending, Government has contributed nothing to growth during the period. As exports were flat for last two years and net exports thus contributing nothing to growth, the American consumer remains the only game in town.

Consumption is leading the US economy back to stable growth, even with the carnage in the energy complex stabilizing and the employment losses abating. For consumption to expand, going forward, any one of four factors is required to expand: employment payrolls, higher real wages for those employed, leveraging credit, or greater wealth. A job, unfortunately, is necessary to access credit and higher wages, while wealth is largely beyond their control. Thus, the number of people employed remains the critical driver of consumption growth.

Echoing Demand. A major determining factor for employment gains is demand, and domestic demand requires new household formation. The story since the Great Recession is intermittent household formation. The rarity of declines in household formation can be summed up in one statement: they are unique in occurrence since the Great Depression. This outcome is startling outcome given that the Echo generation (the Baby Boom’s children) are entering the workforce in number that exceeds that of the Baby Boom.

Whether they were leaving high school or college, the Millennials delayed entry into the workforce. The dropping rate of participation was a trend well established before the Great Recession. In contrast, the near retirement age group (the Baby Boom) is virtually unchanged since the Great Recession: they kept working. Poor employment prospects and higher education attainment may have driven a declining labor force participation rate for the young. If the past is prelude, they eventually look for a job, leave home, and bring demand via new household formation.

Changing Jobs. The composition of the labor force is changing as the type of employment reflects the new employment landscape. A hallmark of the Great Recession was the massive reduction in the construction and manufacturing workforce as home building faded and manufacturing increased efficiency. As necessity is the mother of invention, these people moved from goods producing to service providing. Even the lions of Wall St who worked in finance have just seen their employment return to its prior peak.

Younger workers with less experience and more technical savvy are replacing the older workers, who increasingly want entertainment or someone to help them in retirement as they exit the labor force. A fortunate few are working in technology and management. Much as manufacturing returned to prior sales highs with fewer people, these sectors are doing more with less. Some are choosing to work part-time while other don't have a