Consumer drove much of US economic resilience and outperformance vs other advanced economies
One of the main reasons the US economy managed to avoid recession over the last couple years is the surprise strength of the US consumer (with an assist from government spending).
It’s also why the US’s economic recovery has outpaced those of other major advanced economies. Since the end of 2019, US real (inflation-adjusted) consumer spending is up over 11% (chart below, blue line). But for the Eurozone (gold line), UK (green line), and Japan (red line), their spending rebounds from Covid have stagnated back at 2019 levels.
On top of faster growth, consumer spending also matters more to the US economy… It’s almost 70% of US GDP, compared to roughly 60% in the UK and 50% in the EU and Japan.
Spending was enabled by fixed-rate mortgages, pandemic-era savings, strong income growth
There are a few reasons why the US consumer has been so strong:
- Many consumers locked in long-term low fixed-rate mortgages, partly insulating them from the Fed’s rate hikes. (60+% of outstanding mortgages still have rates below 4%.)
- US consumers built up over $2 trillion in excess savings during the pandemic via stimmy checks, enhanced unemployment benefits, child tax credits, and being stuck at home restricting spending.
- Strong real income growth (4% YoY in 2023) thanks to still-high wage growth and a record 8.7% cost of living adjustment for Social Security in 2023.
- The “wealth effect” from rising property values and investment portfolios. When consumers “feel” richer, they’re more likely to spend. And across the income spectrum, household wealth is up 30%-45% since the start of the pandemic, thanks to a $12 trillion increase in home equity since 2019, along with the stock market rally boosting equity holdings, and higher rates increasing interest income.
- And consumers added over $300 billion to their credit card balances since 2021.
All of these factors helped US consumers keep spending, even when inflation was at its peak.
Some spending supports have faded (excess savings, income growth)
But some of those supports for spending have faded, and signs of stress have emerged.
Estimates show aggregate excess savings were fully spent by March of this year.
Real income growth has slowed, but – importantly – it still remains positive.
More consumers have fallen behind on payments, with the delinquency rates for credit cards (blue line) and auto loans (green line) both above pre-pandemic levels.
However, there are signs that these delinquency rates have started to reverse.
Spending now slowing, particularly for big-ticket items that often require financing
In response to these headwinds, consumer spending growth has slowed. After rising +2.2% YoY in 2023, real consumer spending is up +0.4% YTD through April (chart below, blue line).
Durable goods have been the biggest drag, with spending on them down 2% this year (black line). But, since durable goods tend to be big-ticket items – like cars, appliances, and furniture – that often require financing, it makes sense that today’s high rates would particularly impact durable goods.
Services spending, on the other hand, is up +1% this year (green line). Since services account for 66% of spending – compared to just 13% for durable goods – services is big enough to keep headline spending rising, even with durable goods spending falling.
Services spending and solid labor market enough for consumer to keep supporting economy
So consumers are still spending, but they’ve become more cautious.
Consumers are opting for store brands more often, and companies are particularly worried about low-income consumers, who often don’t have much savings to fall back on.
Still, as long as the labor market holds up and consumers keep seeing positive real income growth, consumer spending should continue to support the economy (and earnings growth)… just at a slower pace than before.
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