The market is down, the US has seen two consecutive quarters of shrinking Gross Domestic Product, and the housing market is definitely cooling off. So is it all the news bad for the US economy?

No. Even during severe downturns there is usually a sector or two that is improving. And whether the US is in a technical recession or not, there is one part of the economy that is still doing well. 

Today Deal Report wants to focus on consumers. Consumer spending makes up about two-thirds of the Gross Domestic Product in the United States, so consumer behavior can drive the overall economy. 

And consumers are resilient. They may slow down spending for a bit, and they can definitely shift spending in ways that spell trouble for one sector or another, but overall they tend to increase spending. 

Above you see US personal consumption expenditures since the beginning of 1989. As you see, there were four recessions during that time, plus the one we may or may not be in right now[1]. 

There were short-term dips in consumer spending during all four recessions. But spending only dropped below year-earlier levels twice: during the Great Recession of 2008 and 2009 and during the COVID recession of 2020. And of course, during the COVID recession many people were locked in their homes and couldn’t spend! 

Stock markets are more jittery than consumers, so those short-term dips created some nice buying opportunities for long-term investors. Below you can see the Consumer Discretionary Select Sector SPDR Fund (NYSE: XLY). During the Great Recession, consumer discretionary stocks dropped by half. They then recovered within two years, creating an opportunity for investors to double their money. The ETF doubled again after the COVID lows. 

What lies ahead for US consumers? Well, in some sectors there are already signs that consumers are pulling back. Specifically, home sales are declining in the face of rising interest rates, and auto sales are tough both because of high borrowing costs and because an ongoing supply chain problem means that many of the most popular cars are not available. But overall consumers are spending. In the second quarter GDP decline, the culprits were decreased residential fixed investment, as mentioned, declining state and government expenditures after the huge spending associated with COVID, and reduced inventories among businesses[2]. 

Going forward, the consumer also looks healthy. 

Mastercard makes an annual estimate of holiday spending and the big credit card company is projecting healthy sales for the holiday season. Specifically, Mastercard believes that retail sales not counting automobiles and gasoline will increase by 6.2% compared to 2021[3]. 

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And that is coming off a pretty good year, when consumers made up for restrained spending during the worst of COVID in 2020. If the projections hold, it will represent a 16.2 percent increase above the 2019 pre-COVID holiday season. 

Aside from the overall health of the consumer, there is one item that stands out in Mastercard’s outlook. It is calling for in-store retail to increase more than online sales. The consumer’s desire to get out of the house continues even several months after COVID forced everyone to stay home. 

Restaurant sales also continue to increase, though inflation makes that increase seem larger than it is[4]. And travel is back to pre-COVID levels, led by leisure travelers[5].

There are areas of the economy that should cause an investor concern. Deal Report is currently doing some work on the commercial and residential real estate markets and will have a report for you on those sectors in the coming weeks. 

For now, the lesson is that consumers like to spend, and in the current healthy job market, Mastercard is projecting continued strong consumer spending during the key holiday period. 

Your Checklist Items: Even during bear markets and economic uncertainty, investors should look to the sectors which are showing strength. Oftentimes, consumer spending, even discretionary spending, can be one of those sectors. 

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_{[1] https://fred.stlouisfed.org/series/PCE#}

_{[2] https://www.bea.gov/news/2022/gross-domestic-product-second-estimate-and-corporate-profits-preliminary-second-quarter}

_{[3] https://investor.mastercard.com/investor-news/investor-news-details/2022/Mastercard-SpendingPulse-U.S.-Retail-Sales-Expected-to-Grow-7.1-This-Holiday-Season/default.aspx}

_{[4] https://restaurant.org/research-and-media/research/economists-notebook/economic-indicators/total-restaurant-industry-sales/}

_{[5] https://www.ustravel.org/research/monthly-travel-data-report}

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