Macroeconomic Factors and Performance of Consumer Staples and Consumer Discretionary Sectors
Consumer Sectors: Importance of Macroeconomic Analysis is Falling
The consumer staples sector consists of companies that provide products considered to be necessities. These include beverages, food products, household products, and personal care products. Products or services that consumer discretionary sector companies provide to customers are seen as non-essential items people purchase with their leftover spending money. These include automobiles, hotels, leisure equipment and activities, apparel, and certain luxury goods.
Consumer staples and discretionary sectors’ performances exhibit different patterns throughout the business cycle. Because companies in consumer staples provide necessities to customers, the performance of the sector tends to be relatively stable throughout the economic cycle, often outperforming the market during recessions. Unlike consumer staples, consumer discretionary sector exhibits the opposite performance pattern. Consumer discretionary tends to outperform the market during expansionary and boom periods. As a strong economy boosts personal and household income, people begin to buy not only daily necessities but also new personal or household goods with their extra spending money. In the mid and late phases of the economic cycle, consumer discretionary sector tends to match or underperform the economy during a recession.
What makes the performance of consumer staples and discretionary differ? The difference in performance lies in the fact that those sectors are affected by different macroeconomic variables, even though both sectors manufacture and provide products directly for consumers. Most macroeconomic factors do not show cause and effect relationships that always work for every sector and every phase in the economic cycle, but there are certain rules of thumb we can follow to explain certain sectors’ returns. Since performance of consumer staples and consumer discretionary sectors is related to consumers’ ability to buy products, indicators that measure personal income are important, as well as the dominant monetary policy and trade balance.
According to Cannivet and Teufel (2009), the macroeconomic drivers in the consumer staples sector are economic growth, consumer prices, producer prices, government spending, and net exports. According to Renaud and Teufel (2010), the macroeconomic drivers in the consumer discretionary sector are consumer spending, income, employment, economic growth, interest rates, currency, taxes, and trade (Angeline, 2014). Variables like unemployment rate and consumer price index measure the consumer spending level and variables like interest rates and trade balance shows how the country’s monetary policy and trade are like. Unemployment rate is a great proxy to measure consumer spending level or inflation because it is clear that the more people have jobs, the more money will come into households, and the amount of money circulated in the economy is increased. Interest rate shows what the government intend to do for their economy for future years. Moreover, lower interest rates will increase money supply in the economy because it is a signal that firms can borrow money at a lower cost than before. Increased money supply will lead to decline in value of currency and it leads to an increase of exports with relatively lower price of trade goods. A slight change in a macroeconomic factor, such as the Federal Reserve’s interest rate in the U.S., tend to have serial impacts to the rest of the world. Although it is really hard to predict things that are going to happen caused by certain macroeconomic factors, macroeconomic factors are important as great indicators to see where the economy stands in the economic cycle.
A study from researchers at the University of South Dakota examined which macroeconomic factors affected consumer staples and discretionary sectors. A statistical model for the study showed that unemployment rate had a statistically significant negative effect on consumer staples sector performance. CPI also had a negative impact but not statistically significant effect on the sector. Trade balance had a positive statistically significant effect on the sector’s price and interest rate had a positive impact on price which is different from the expected effect. Oil had an increasing and statistically significant negative effect on sector’s price and M2 money supply displayed statistically meaning positive effect on consumer staples sector price. Overall, consumers spend more staples when there is more money being exchanged in the economy. Unemployment rate and interest rate could be appropriate indicators to see how consumer staples sector is doing. Variables that showed statistically significant effects on consumer staples and discretionary sector are the unemployment rate and interest rate. Because consumers spend money on necessary goods and spend their extra money on consumer discretionary sector businesses, such as luxury goods, variables that are related to household income and amount of money exchanged in the economy had meaningful effects on the performance of both sectors.
Therefore, macroeconomic indicators may present clues to find a good measure of consumers’ spending pattern and so companies’ performance in consumer staples and discretionary going forward. Unemployment rate is one of economic leading indicators that give clues to demand for consumer staples goods. It is reasonable to think that the demand for consumer goods will increase as more money flows into the household. In addition, oil price is also another great indicator to measure performance of consumer staples sector. A rise in oil prices will lead to an increase in logistics costs. There are two possible outcomes caused by a rise in logistics cost. Consumer staples firms may raise the price of their goods due to increased cost of goods. The other scenario is that firms keep the price of their goods and reduce their profit margins as cost of goods and logistics cost raised. Generally, the more money supply we have in the economy, the more money flows into households to boost consumer staple sector.
However, although macroeconomic indicators can provide general view of how consumer staples and discretionary sectors perform going forward, the importance of macroeconomic factors is getting weaker. These days, competition among companies has been getting tougher, and new technology creates new industries or disrupt existing industries. Moreover, most growth in the consumer goods industry comes from smaller and newer brands, rather than mass-market brands. Technology and E-commerce are getting attention as a growth driver for consumer-oriented businesses. Technology is revolutionizing how consumers engage with brands, and data-driven marketing strategies are growing more popular in companies that want to attract consumers more effectively and efficiently. Traditional retail business like Walmart, the largest retail business in U.S., is innovating with technology. Walmart harnesses robotics for restocking shelves and tracking inventory levels to improve the process. Also, Walmart integrates shoppers purchase data into the mobile app and customers can initiate return process with the mobile app. In addition to that, health consciousness and better-for-you are important disrupting trends in the industry, especially for food companies. Demand for healthy organic food has been growing rapidly and demand for vegetarian diets is elevating. The millennials prefer products that they found in social media or more innovative brand that offer customized solutions. Target Corp. is one example of consumer discretionary companies that embraces technology and demand for health-conscious food. Target started its new organic food line Good&Gather for those who are health-conscious customers. This is a strategic move from Target to draw both their existing and potential customers into its broad and diverse products by providing one-stop solution.
Overall, macroeconomic factors are useful tools to figure out where the U.S. economy stands in the economic cycle. However, the effectiveness of macroeconomic indicators is getting smaller as forecasting technique to measure sectors’ performance. As technology advances, bottom-up strategy is more reliable technique to get an idea of performance of companies in consumer sector. Although it is undeniable that consumer discretionary sector has more chance to outperform the market and generate relatively high growth when economy start to rebound from recession and expand, company’s business model and its ability to open up niche market opportunity for forthcoming years through technology integration and strategies to adapt to changing market conditions is more important than macroeconomic view. The role of macroeconomic factors is limited to providing a guideline to investors and an evidence to current happening events rather than an effective predictor of future economic events.
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