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STA Weekly Report – The State of the US Consumer

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The State of the US Consumer
1033 Exchanges: Tax Relief for Involuntary Conversions due to Fire, Theft, Natural Disaster, Eminent Domain, Seizure and Condemnation
401k Plan Manager

Consumer spending makes up a large part of all U.S. economic activity. In fact, it makes up approximately 70% of economic activity. This helps explain why a strong consumer is critical to economic performance domestically.

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Since the financial crisis the consumer has had it pretty good. Just think about the job market, which underpins consumer activity. Since 2010, the civilian unemployment rate has steadily decreased. At the same time, the ratio between employed civilians and the total population has been steadily rising. 

And although wages have not improved at the pace that has been expected, the small improvement in wages over the last 5 years has been enough to impact spending and the domestic economy. Afterall, when consumers have access to jobs, as they have had for years now, and positively trending wage growth, spending unsurprisingly increases.

Additionally, we have had expansion in consumer credit which has also provided a nice tailwind for consumer activity.    

However, all good things typically must come to an end and as we get closer and closer to the end of the current business cycle, as investors it is important to look for inflection points.

A couple of weeks ago, we got a Consumer sentiment report for the month of May which came in at 102.4. This was well above estimates and an increase of 5.2 over the April numbers. This is the highest level in 15 years.

Looking a bit more closely, we saw that most of the gain was attributed to an uptick in expectations rather than current conditions. This all makes sense as at the time of its release, the trade talks between US and China were still being viewed as more constructive. Since then however, trade talks have gone in reverse. Moreover, we are seeing signs of weakness in the quarterly results from the retail sector, a sign that perhaps consumption is slowing or at the very least expected to slow.

While not necessarily a canary in the coal mine for the economy, more negative data points for the U.S. consumer could hit consumer and investor confidence and have follow on effects to other areas of the economy.

Considering that, investors should be paying close attention to the consumer and key indicators that could signal either a reacceleration or slowdown in consumer spending as we head into the second half of the year. 

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STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer

Andrei Costas, Senior Investment Analyst (Equity Strategies)

Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

1033 Exchanges: Tax Relief for Involuntary Conversions due to Fire, Theft, Natural Disaster, Eminent Domain, Seizure and Condemnation

Authored By: 
Scott Bishop, CPA/PFS, CFP® and Michael Churchill, MSPA, CPA

Understanding the tax benefits of using Code Section 1033 of the Internal Revenue Code can help a taxpayer to defer what otherwise would have been a recognized gain due to an involuntary conversion of their property.  A commonly used “cousin” to the 1033 exchange is a 1031 exchange, which also provides tax benefits for deferring the recognition of gain for the sale or property. The important difference between the two is that a 1033 event is unplanned or unexpected and the 1031 event is the opposite, hence the phrase “involuntary conversion.”  Because of the planned nature of 1031 Like-Kind exchanges, there’s more structure to the process, limitations on what constitutes a Like-Kind exchange, and more stringent time frames to follow.  Conversely, the 1033 exchange is much more flexible with far fewer restrictions and “red tape.” 

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