Consumer strength has been one of the great surprises of 2023. Recent comprehensive GDP revisions suggest that consumers still have a sizable excess savings cushion accumulated fromgovernment aid during the pandemic. Indeed, the Federal Reserve's Distributional Financial Accounts report shows remarkable growth of 28% or $2.9tn n deposits in checking and savings accounts (incl.money market deposit accounts) between 4Q19 and 2Q23. Of course, households have also had to confront high inflation, somoney put in the bank in 2020 isn't worth the same today. On a real basis, the samemeasure of liquid assets is 9% higher than in 4Q19-still decent growth, but well off its inflation-adjusted peak of 28%.

The question then becomes, how are these savings distributed? The Fed report provides some insight. After adjusting for inflation, the bottom80% havemostly exhausted their accumulation in cash deposits, while the top 20% still retain a decent share of deposit growth, as shown in the chart. This support should allow for continued spending gains in areas such as luxury goods, leisure services and consumer durables, while challenging spending on consumer staples by lower and middle-income households.

That being said, the economy counts by dollars and not heads, so even if strength is isolated to the top 20%, this can be a significant driver of economic growth. Overall, as strong retail sales data underscored last week, the consumer remains remarkably resilient and savings cushions still look supportive.

Entering 2023, many analysts had penciled in a mild U.S.

recession by mid-year. However, strong incoming economic data kept delaying the start date. Growth remained steady in the first half of the year, despite a hiccup in 1Q23 due to the regional banking crisis, and, more recently, a combina- tion of positive impulses boosted 3Q23 GDP growth to a real annualized rate of 4.9% - the fastest pace in two years.

Zooming in on specifics, a notable summer splurge, par- ticularly by affluent households, propelled private consumption to 4% growth for the quarter. This surge contributed over half of the acceleration in real GDP growth. Inventory accumulation, typically a volatile component, was the second largest contributor, as automakers stockpiled ahead of anticipated strikes. Housing shortages drove res- idential investment, while national defense spending boosted the government's contribution to GDP, each adding 0.2%-pts. On the flip side, non-residential invest- ment was a major drag on growth - potentially indicating a cautious turn in business sentiment.

While the headline GDP figure seems impressive at first sight, it likely overstates the strength of the economy. A recent backup in long-term yields has weighed on stocks, and poses a risk to the spending surge by wealthier households through negative wealth effects. The positive impulses from inventory build-ups and government spend- ing will also likely be transient; and while the Fed may acknowledge progress on core-PCE inflation when holding rates steady this week, it will likely keep the door open for a December rate hike. As a result, investors should brace for a slowing economy by maintaining well-balanced portfolios of financial assets and may want to consider adding alterna- tives that can provide durable streams of income, additional

diversification, and more robust rates of return.

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