Key Questions: How Much Longer Can the US Consumer Carry the Economy?

In the grand theater of economics, the US consumer often plays the lead role. Consumer spending accounts for a significant portion of US GDP, approximately 70%, which would suggest that if the US consumer were a country, it would be larger than Germany, Japan, India, and the UK combined. Fueled by a massive amount of government stimulus and significant pent-up demand, a surge of spending occurred once the economy re-opened post Covid-19. Therefore, the US economy has seen an incredibly robust growth. With households flush with savings from stimulus payments and reduced spending during the lockdown, sectors such as retail, hospitality, and leisure rebounded the strongest as pandemic-related restrictions eased. Most notably, the housing market experienced a boom driven by low mortgage rates, elevated existing home sales, and new construction activity. Additionally, with strong job creation and declining unemployment, the labor market rebounded faster than anticipated.

First, we should acknowledge the undeniable power of the consumer. From overcrowded shopping malls to the click of “checkout” buttons online, consumer spending fuels the engine of economic growth. Commentary from the management teams of several credit card companies suggests, that US consumer spending across most segments has remained relatively stable and data does not indicate any meaningful behavior changes. Additionally, March’s adjusted US Retail Sales grew 4.5% year-over-year.² The strong March reading reflects a combination of multiple forces, including much-anticipated receipt of tax refunds and eCommerce re-acceleration. Strong consumer spending is bullish for the economy and demonstrates continued confidence in economic growth. Recently, however, we have observed mixed readings suggesting things may be reversing. So how sustainable is this reliance on the consumer?

The consumer-led economy is not without its weaknesses. When looking closer at the various income segments, lower-income consumers are facing pressures, especially inflation. Data indicates lower-income consumers are pulling away from restaurants and visiting grocery stores more often.³ Several consumer companies have highlighted customers’ value focus: shopping around events and conveying a cautious tone. Middle- and high-income consumers are also seeing some minor strain, particularly on bigger ticket and discretionary purchases, but overall are still in a relatively healthy shape given the strong equity and housing markets.

Furthermore, M2 or money supply is a key metric used to measure the total amount of money in circulation within the economy. In March, M2 stood at just over $21 trillion. As we have noted in other reports, this is down more than $1 trillion from its peak in 2022, the biggest decline in history.¹ This suggests that consumers no longer have elevated excess savings to continue to stimulate economic growth. With savings shrinking, consumers are also relying on debt to maintain their spending habits. While debt can be a useful tool for financing purchases and stimulating economic growth, excessive consumer debt can pose risk. Moreover, unpredicted shocks to the economy, such as elevated job losses or sudden interest rate hikes, could diminish consumer confidence. So, how much longer can the consumer carry the economy?

The market's continued confidence in a strong US economy and growth in corporate profits has been a positive thus far. Additionally, wages and investment income are two important factors of economic prosperity.

The Employment Cost Index in the first quarter surprised to the upside, suggesting that the deceleration in wages has come to an end, at least for the moment. With wages holding and investment income up, the death of the consumer may be greatly exaggerated. Employment influences labor market dynamics, including wages, labor force participation, and job satisfaction. What happens in the labor market will be important, and should a robust labor market persist, a thriving and resilient economy can be sustained.

Moreover, while the above-referenced decline in M2 is the biggest on record in dollar terms, M2 itself is still roughly $6 trillion higher than it was before Covid-19, providing some important support. In conclusion, the consumer will continue to play a central role in driving economic growth. The consumer’s ability to adapt and evolve will be essential to ensure economic stability.