Q3 2017 Quarterly Outlook


Two items that are currently occupying media headlines (aside from Trump) and benefit the U.S. consumer include The Amazon Effect and stubbornly low oil prices. While seemingly disparate topics, both are interconnected and provide strong tailwinds for the U.S. consumer in a variety of ways.
The Personal Consumption Expenditure (PCE) is the Federal Reserve’s preferred measure of inflation because it is designed to measure a wide range of household spending including autos, clothing, jewelry, gasoline, and housing. The PCEis a core input to the Fed’s decision making process and ultimately influences the direction and magnitude of the implementation of monetary policy (level of short-term interest rates). It is widely known that the recent aim of Fed policy over the last several years has been directed at creating inflation, a herculean task given a number of deflationary factors in the economy.
It would be hard to overstate the role that The Amazon Effect has played in undermining the Fed’s best efforts to escalate inflation through the U.S. economy. It is estimated that Amazon’s Prime service has over 80 million U.S. subscribers or approximately one-third of all U.S. adults! When this group is included with the non-Prime Amazon shoppers, it is safe to assume that more than 50% of the U.S. population has directly benefitted from Amazon deflation. Most investors probably forgot that it was not too long ago that the online retailer largely sold books, but since has moved into almost every household category. And this is only half of the story; do not forget the traditional brick and mortar retailers that have been forced to indirectly compete. All together, Amazon is providing one huge stimulus package to the U.S. consumer.
In addition, consumers are spending less on gasoline due to both lower prices and improvements in fuel efficiency (which pressures demand), enhancing the spending potential of consumer wallets. Currently, the average price of gasoline is $2.20 per gallon and sits at multi-year lows providing additional consumer stimulus.
In the end, there is a self-serving element to the narrative. Lower prices for everyday goods, combined with declining energy prices, has increased deflationary headwinds resulting in lower interest rates. What a time to be a U.S. consumer!

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