Consumption Less Conspicuous

With consumer spending constituting roughly 70 percent of U.S. economic activity, economic growth and consumer sentiment have been considered inextricably connected.

But with unemployment still stubbornly high, consumer confidence stubbornly low, and consumers—for the first time in decades—saving money and paying off debt (a good chunk of that through bankruptcy), how will growth manifest itself in any sort of economic recovery? And to what extent will a diminished contribution from consumers affect the recovery—and reshape investment decisions for those looking to capitalize on a stronger economy?

As senior equity portfolio manager of Minneapolis-headquartered Thrivent Financial for Lutherans’ Large Cap Growth Fund, David Heupel has to figure all that out.

The market clearly anticipates an economic recovery. But when you think about economic ‘growth,’ what will it look like in the next 12 to 18 months?

Heupel: Looking forward, growth will be driven by end-market demand. Much of the earnings recovery to date has been tied to inventory replenishment and cost reductions, along with a modest bounce from what was a very severe bottom. Most companies, when you listen to their 2010 outlook, are still cautious because while they are seeing hints of a sustainable pickup, it’s not smacking them in the face yet.

What we need to see is a broad-based, demand-driven recovery. I do think we are going to have it. We still have a low interest-rate environment; the employment rate is at least stabilizing, if not starting to look a bit better; and I think we’re going to start seeing a more demand-driven focus as we progress through 2010.

The consumer doesn’t seem all that optimistic. How do you define ‘demand’? 

Heupel: I think the improvement in demand, the need for more goods and services by the end user, will be global and broad based. With interest rates remaining at historic lows—people feeling a little bit more secure about their jobs, the value of their house, and a better-looking 401(k) balance—I expect to see the consumer purse strings begin to loosen. If you look at some of the consumer-centric sectors, such as retailers and restaurants, we are seeing improving comparative store trends. It’s not a groundswell yet, but certainly a trend toward improvement.

Cyclical areas of the economy, such as the industrial markets, will improve both internationally, with countries like China seeing a resurgence in growth, and domestically as our economy recovers.