The US consumer isn't in trouble. Here are 5 stats that show Americans will be fine even amid dwindling savings and student loan payments.
Consumers are "rebalancing" spending priorities in response to inflation, says Mastercard's head of marketing and communications
Matthew Fox
Sat, July 15, 2023
A resilient consumer has helped stave off a recession so far.
The US consumer is doing just fine, and their resilient spending habits should help stave off a recession.
That's true even amid concerns of dwindling excess savings and the imminent resumption of student loan payments.
These five charts help show just how resilient the US consumer is despite fears of a recession.
The US consumer is doing just fine as they continue to spend money despite elevated inflation and ongoing fears that a recession will soon hit the economy.
Despite some commentators sounding the alarm, the US consumer isn't in imminent financial trouble because of dwindling excess savings from the COVID-19 pandemic on top of student loan payments set to kick in again later this year.
That's the big takeaway from Carson Group's chief market strategist Ryan Detrick, who highlighted just how strong the consumer really is based on various economic datasets in the firm's 2023 mid-year outlook report.
The consumer is important to track for because about 70% of the US economy is driven by consumer spending, which relies heavily on the daily spending habits of more than 300 million Americans.
And current data is pointing to stronger trends today than pre-pandemic.
These are the five key charts that show just how strong the consumer is, and why that strength should continue to shield the US economy from an imminent recession.
1. Monthly debt payments are manageable.
Carson Group
"When thinking about debt, the key question is whether households are able to service that debt," Detrick.
Enter the household debt service ratio, which measures the percentage of consumers' income that is being used to pay off all types of debts, from mortgages to credit card bills to student loans.
Based on estimates from JPMorgan, the household debt service ratio at the end of the second quarter was 9.7%. That figure is well below the 13.2% reading seen in the fourth-quarter of 2007, and it's also below the pre-pandemic average of 11.2%. That gives the consumer plenty of wiggle room to take on more debt if they need to, which would lead to more spending and help lift the economy.
2. Real income growth.
Carson Group
For much of the past two years, wage gains have failed to keep pace with quickly rising inflation. But with inflation finally falling, and wage gains holding steady, that's changed. It means consumers ultimately have more money in their pocket, another good sign that should support the economy going forward.
"Disposable income has grown at an annualized pace of 10% over the first five months of this year. Meanwhile, inflation is running just about 4%, meaning households are seeing real income gains," Detrick said.
3. A healthy balance sheet.
JPMorgan
Consumers have $168.5 trillion in total assets compared to just $19.6 trillion in debt. That's a healthy balance sheet and doesn't suggest a period of weakness ahead.
4. A strong jobs market.
Carson Group
At the end of the day, all that matters is that consumers have jobs, as that's what fuels the bulk of their spending habits. If they have a paycheck, they're spending money. So it's no surprise just how important the strength of the job market is for the consumer, and right now the job market is looking great, with plenty of open positions for those that are looking around.
"The employment-population ratio for prime-age workers (25-54 years), which accounts for labor force participation issues and an aging population, is now at 80.7%. That is higher than at any point between 2002 and 2022. This is truly remarkable, and points to a labor market that is the strongest we've seen since the late 1990s," Detrick said.
5. Strong spending trends.
Carson Group
"Consumption continues to run along the pre-pandemic trend, even after adjusting for inflation... Spending driven by rising real incomes means consumers don't feel the need to borrow to the extent they did before the pandemic," Detrick said.
Americans are feeling better about the economy. But economists say not so fast
Josh Schafer
·Reporter
Sun, July 16, 2023
American consumers haven't felt this good about the economy since September 2021.
Stocks are higher, with some strategists even suggesting a record-setting year for the S&P 500. Inflation has fallen from north of 9% to 3%, according to one metric. And all of this, while the US labor market remains tight with a historically low unemployment rate.
Friday's preliminary July reading of the University of Michigan's Consumer Sentiment Index reflected the recent positive signs, with the index's 13% jump from June marking the largest monthly increase since 2005.
But the positive vibes aren't in line with what economists believe recent data is telling us about the US economic outlook moving forward.
"It is important to avoid reading too deeply into the details of a single month's report," warned Jefferies US economist Thomas Simons on Friday.
He continued: "We remain steadfast in the view that the economy is going to take a turn for the worse within the coming months, but it seems that consumers are becoming more sanguine and buying into the soft-landing or 'no-landing' narratives, at least for now."
The narrative of a soft landing Simons references has become more prevalent as economic data has largely surprised economists to the upside recently and stocks have rallied to begin second-quarter earnings season. Last week, consumer prices increased at their slowest pace since March 2021 while producer prices showed similar signs of cooling inflation.
In the labor market, weekly jobless claims of 237,000 came in lower than expectations for 250,000 claims. Meanwhile, the recent June Jobs report showed some slowing from previous months but still revealed 209,000 jobs, the unemployment ticked lower to 3.6%, and average hourly earnings grew 4.4% from the year prior.
In reaction to the compilation of data, Wells Fargo's economics team wrote "better than expected doesn't mean all is well." The economics group at Bank of America's Global Research said it's "encouraged but not carried away."
An American flag balloon in the Fourth of July parade in downtown Washington D.C., July 4,2023. (Photo by Robb Hill for The Washington Post via Getty Images)
"Since our prior outlook in June, our expectations for the U.S. economy have not materially changed," Wells Fargo's team led by Chief economist Jay Bryson wrote in a monthly update on Thursday. "We continue to believe that the Federal Reserve's efforts to restore inflation back to 2% will slowly squeeze household and business spending, generating a mild downturn early next year."
The case that a recession still looms is based on slowing consumer spending, the lagging impacts of monetary policy and a belief that, while inflation is cooling, the path for the final one-percentage-point decline in headline inflation to meet the Fed's 2% goal will be much longer than the past year's precipitous fall.
"We think it is too early for the Fed to declare victory on inflation," BofA US economist Michael Gapen wrote. "Despite the significant softening in the CPI and PPI, our core PCE inflation forecast for June still annualizes to 2.4%, or 40bp above the Fed’s target."
Wells Fargo notes that slowing disinflation combined with the softening jobs market, will weaken disposable income in the coming months. Eventually, that will lead to slowing growth and a "mild recession" in early 2024.
"Consumers are running out of steam," the team wrote.
Josh Schafer is a reporter for Yahoo Finance.
Josh Schafer
·Reporter
Sun, July 16, 2023
American consumers haven't felt this good about the economy since September 2021.
Stocks are higher, with some strategists even suggesting a record-setting year for the S&P 500. Inflation has fallen from north of 9% to 3%, according to one metric. And all of this, while the US labor market remains tight with a historically low unemployment rate.
Friday's preliminary July reading of the University of Michigan's Consumer Sentiment Index reflected the recent positive signs, with the index's 13% jump from June marking the largest monthly increase since 2005.
But the positive vibes aren't in line with what economists believe recent data is telling us about the US economic outlook moving forward.
"It is important to avoid reading too deeply into the details of a single month's report," warned Jefferies US economist Thomas Simons on Friday.
He continued: "We remain steadfast in the view that the economy is going to take a turn for the worse within the coming months, but it seems that consumers are becoming more sanguine and buying into the soft-landing or 'no-landing' narratives, at least for now."
The narrative of a soft landing Simons references has become more prevalent as economic data has largely surprised economists to the upside recently and stocks have rallied to begin second-quarter earnings season. Last week, consumer prices increased at their slowest pace since March 2021 while producer prices showed similar signs of cooling inflation.
In the labor market, weekly jobless claims of 237,000 came in lower than expectations for 250,000 claims. Meanwhile, the recent June Jobs report showed some slowing from previous months but still revealed 209,000 jobs, the unemployment ticked lower to 3.6%, and average hourly earnings grew 4.4% from the year prior.
In reaction to the compilation of data, Wells Fargo's economics team wrote "better than expected doesn't mean all is well." The economics group at Bank of America's Global Research said it's "encouraged but not carried away."
An American flag balloon in the Fourth of July parade in downtown Washington D.C., July 4,2023. (Photo by Robb Hill for The Washington Post via Getty Images)
"Since our prior outlook in June, our expectations for the U.S. economy have not materially changed," Wells Fargo's team led by Chief economist Jay Bryson wrote in a monthly update on Thursday. "We continue to believe that the Federal Reserve's efforts to restore inflation back to 2% will slowly squeeze household and business spending, generating a mild downturn early next year."
The case that a recession still looms is based on slowing consumer spending, the lagging impacts of monetary policy and a belief that, while inflation is cooling, the path for the final one-percentage-point decline in headline inflation to meet the Fed's 2% goal will be much longer than the past year's precipitous fall.
"We think it is too early for the Fed to declare victory on inflation," BofA US economist Michael Gapen wrote. "Despite the significant softening in the CPI and PPI, our core PCE inflation forecast for June still annualizes to 2.4%, or 40bp above the Fed’s target."
Wells Fargo notes that slowing disinflation combined with the softening jobs market, will weaken disposable income in the coming months. Eventually, that will lead to slowing growth and a "mild recession" in early 2024.
"Consumers are running out of steam," the team wrote.
Josh Schafer is a reporter for Yahoo Finance.
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