Consumer Sectors Outlook: A Mixed Picture

The state of the American consumer is key to economic outlooks for the U.S. and, at times, for the entire world. So how’s it looking now?

“Quite solid,” says Brad Sorensen, managing director of market and sector analysis at the Schwab Center for Financial Research. The strong economy continues to support high levels of consumer confidence, and June’s Consumer Confidence Index®, as reported by The Conference Board, revealed little negative impact from ongoing trade disputes.

“One reason confidence remains high in the face of increased trade tensions could be that Americans are finally recognizing the effect of the Tax Cuts and Jobs Act on their wallets,” says Brad. According to Strategas Research, the consumer and small-business portion of the tax cut will amount to roughly $112.5 billion this year. And the labor market continues to look healthy: The unemployment rate remains near historic lows, ticking up just slightly in June due to the increase in the size of the labor force in response to ongoing demand.

Two sectors to watch

The Global Industry Classification Standard, or GICS, breaks equities into 11 sectors—two of which focus on the consumer. Here’s a brief look at what distinguishes them:

Consumer staples: Consumer staples are considered essential products—such as food, beverages, tobacco and household items—that people are either unable or unwilling to cut out of their budgets regardless of their financial situation. During periods of market volatility or economic downturn, consumer staples companies are typically viewed as safe havens, and may even perform well as market uncertainty intensifies.

Consumer discretionary: Consumer discretionary companies, on the other hand, manufacture products or offer services that are generally considered non-essential but are desirable when consumers are confident in their ability to afford them. When the economy is strong, employment is high and the stock market is performing well, consumer discretionary companies tend to benefit. Examples of industries in this sector include apparel, textiles, leisure, entertainment and automobiles.

Year-to-date performance

Despite favorable conditions, both sectors have fallen since the beginning of the year—although both have recovered somewhat in the past two months.

Consumer staples have benefited as ramped-up trade concerns and worries over global growth appear to have helped the sector’s performance. The consumer discretionary sector has performed essentially in line with the market, although spending on traditional retail items has been cautious, and competition among retailers may limit profitability. And the spending mix is shifting, with online sales rising and traditional department store sales tepid—creating a tough environment for many retailers.

Consumer headwinds

Consumers also face some headwinds. One is the sluggish wage growth we’ve seen throughout much of this economic expansion. Although this has kept inflation relatively low and allowed the Federal Reserve to proceed on a slow and steady course toward normalizing monetary policy, it may also have impeded Americans’ ability to really ramp up spending. And in the years after the financial crisis of 2008, we haven’t seen consumer debt, measured as a percentage of Americans’ disposable income, increase in a substantial way, which might have helped to further fuel spending. 

There are other risks, as well. The Fed continues to raise short-term interest rates, and despite its gradual pace, monetary policy is contracting, with lending conditions tighter now than they were for quite a while.

Then there are the tariffs. The U.S. has imposed some tariffs goods from China, Mexico, the European Union and Canada and has announced plans to impose others. While they still amount to a relatively small sliver of the U.S.’s nearly $20 trillion economic pie, they could grow. And the longer the trade skirmish goes on, the greater the potential for consumer confidence to wane.

At the same time, oil prices are rising. “While we are less dependent on oil than we used to be—with more efficient cars and appliances combining with different fuel sources to make oil a little less important to our society—if oil prices continue to gain from here it would likely start to affect the ability, and willingness, of consumers to spend,” Brad observes.


“The consumer is the powerhouse behind the American economy, and that bodes well—but it doesn’t guarantee anything,” he concludes. Schwab’s outlook for the consumer discretionary sector may change after several large companies (including Netflix and Comcast) leave the sector and are reclassified by GICS as communications companies in the fall. And while consumer staples may be attractive for a near-term bounce, the level of competition the group faces means we’re keeping our neutral view in place.

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Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.                              

The Consumer Confidence Index is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.