Recent U.S. government data highlighted a notable trend: Robust consumer spending drives strong growth expectations. In September 2023, consumer spending surged by 0.4%, adjusted for inflation, despite rising borrowing costs.
Now, some economists warn the current spending spree may not be sustainable. Many households are tapping into dwindling savings or relying more on credit cards. The pandemic savings cushion is nearly exhausted for many Americans, raising uncertainty about future trends.
Despite predictions of a consumer-driven recession, the economy remains resilient. While spending may slow, a collapse seems unlikely.
Moreover, with a year of elevated interest rates failing to dampen the economy, speculation has arisen around a potential “soft landing” in 2024. The debate centers on whether declining inflation could prompt an economic slowdown. Analysts’ predictions for the coming year vary as well.
Fitch Ratings noted strong U.S. consumer spending in 2023, fueled by job gains, solid finances, lower inflation and rising confidence. Income grew by 6.9%, real income by 4.2% and tax payments declined, boosting disposable income.
Consumer wealth rose 5.1% year-to-date in Q3 2023, driven by market and real estate gains. Fitch raised its 2024 spending forecast to 1.3%, citing continued savings drawdown. However, household debt surged, led by mortgages.
Let’s dive into what a resurgence in consumer spending could mean for the economy and investors.
2024 Forecast
In Q4 2023, the U.S. economy likely saw its slowest growth in a year and a half. Businesses reduced inventory investment, and consumer spending slowed slightly. However, this pace likely prevented a recession in 2023. The Commerce Department’s advance GDP report, expected to show moderated inflation, reinforced expectations for Fed rate cuts in the first half of the year.
Scott Anderson, BMO Capital Markets’ chief U.S. economist, foresaw growth in line with the Fed’s goals. In the previous quarter, GDP was raised at a 2.9% annualized rate, which surpassed the Fed’s 1.8%. Yearly growth was also projected at 2.5%.
Despite predictions of a downturn in the past two years, the economy thrived due to its robust labor market environment and notable wage increases. All of this boosted consumer spending.
As economists predict a downturn due to the Fed’s consistent and drastic rate increases, this has curbed more demand. However, ever since these economists revised their forecasts, a slow growth in 2024 is expected, and by 2025, there will be a full rebound for post-projected rate cuts.
While economists still think a downturn will happen, especially now that the Fed has been consistent in putting out rate hikes, most of them have already revised their forecasts. In 2024, they expect slow growth, but that is only because it’s preparing for a rebound to happen in 2025. Despite this, some, like Sam Bullard from Wells Fargo Securities (NYSE:WFC), suggest a “soft landing” scenario, avoiding consistent negative GDP prints.
The Fed’s policy rate, which is currently ranging between 5.25 to 5.50% will most likely stabilize, with the market expecting a rate cut in May.
Reasons Why Consumer Spending Rebounded
The American economy slightly celebrated when 2023 ended because its retail sales surged a good 0.6%. That surpassed expectations from economists and analysts and signals excellent consumer spending in 2024. According to Robert Frick of the Navy Federal Credit Union, consumers were able to surpass retail predictions because of their purchasing power from increased wages and inflation slowly toning down.
Following positive inflation data, economists grew more optimistic for 2024. After producer prices fell in December 2023, Wells Fargo reversed its recession predictions, foreseeing continued economic expansion until 2025. Others remain upbeat, expecting GDP growth around 1%, lower than pre-pandemic levels.
Analysts and economy experts are solid on their 2024 U.S. GDP forecasts in the past months, and consensus shows 2.1% growth. According to the Federal Reserve Bank of Atlanta’s GDP model, Q1 2024 will show a 2.9% increase, down from 3.4% a week ago.
Sharing this optimistic sentiment is the Blue Chip Economic survey, which showed about 87% of economists anticipate a soft landing for America’s economy and recession forecasts declining to 36%.
So, what’s causing the rebound in consumer spending? Here are three I can highlight.
Low Unemployment Rates and Sturdy Job Openings
This year, analysts predicted that employment growth would slow down compared to recent years. Job openings averaged 190,000 in the second half of 2023, down from the peak of 399,000 jobs in 2022. Forecasts also showed only 64,000 jobs per month, usually about 200,000 in past years.
However, American employers opened some jobs and were hiring massively when January came in, opening more than 353,000 jobs. That surpassed December’s 333,000 monthly job openings. Moreover, the unemployment rate was stabilized at 3.7%.
That said, employers exceeded expectations by opening jobs to meet steady consumer demand. While presidential campaigns are happening that are mostly reacting to the Biden administration’s economic performance, public sentiments trembled and somehow eased inflation worries. According to Chairman Jerome Powell, the economy is going strong, but everyone should approach it cautiously due to rate cuts.
Although there have been 11 consecutive rate hikes since March 2022 to fight inflation, there are still fears of a recession coming around the corner. However, with job growth rates slowly getting back on their feet, the economy has faith and resilience, which averts a downturn. That also suggests a soft landing from inflation is soon to happen.
Though high-profile layoffs occurred, overall job market stability prevailed, with hiring robust and unemployment rates healthy.
Resiliently amid Fed rate hikes, consumers tapped into pandemic savings upon reopening. Early retirements, partly COVID-related, tightened the labor market. Recent surveys show rising public confidence, with consumer sentiment surging and inflation expectations dropping.
The job quitting rate, an indicator of wage trends, stabilized pre-pandemic, potentially alleviating wage pressure and inflation concerns.
Healthier Household Finances
In 2024, Americans prioritize saving and reducing credit card debt despite economic challenges. According to a USA TODAY Blueprint survey, top resolutions include building emergency funds, retirement savings, education and major purchases. Despite obstacles, 40% of people expressed strong optimism about their financial prospects.
Americans also prioritize building emergency savings (56%), followed by saving for retirement (53%) and their child’s education (52%). High interest rates underscore the importance of these goals. According to retired real estate agent Paul Jones from Okatie, S.C., paying off low-interest loans is impractical.
Over 18 months, the Federal Reserve raised rates to combat inflation, prompting banks to increase savings accounts and CD yields. Yet, credit card interest surged to 22.77%. Americans aim to save more competitively in 2024. Generational strategies differ markedly.
Americans prioritized financial well-being alongside physical and mental health for the new year. Over 86% of respondents emphasized its importance, with Gen Z, Millennials and even Gen X considering financial health vital.
Consumer Spending Growth Drivers
Consumer spending, driving over two-thirds of the U.S. economy, likely eased to a still robust 2.5% growth rate in Q4 2023. Households dipped into pandemic savings, while low-income groups turned to credit cards for expenses. Despite that, rising borrowing costs hint at consumer strain, possibly slowing spending and stalling the economy in Q2, compounded by reduced government aid.
Dan North, a senior economist at Allianz Trade North America, anticipated a decline in consumption ahead but didn’t predict a recession. Government spending, primarily by state and local governments, drove growth in Q4, supported by increased hiring. Investments in homes also slowed down due to expensive mortgage rates and a limited supply of houses for sale. By Q3, business expenses on equipment had bounced back. Economists had mixed views on the impact of trade on GDP growth.
The core PCE price index, excluding food and energy, rose at a 2.0% rate, consistent with the last quarter. Brian Bethune, an economics professor at Boston College, noted a continued disinflationary trend, citing housing supply shortages as the main inflationary pressure.
What Analysts Say
Opinions vary on the possibility of a “soft landing.” Bank of America (NYSE:BAC) sees it as probable, predicting positive growth throughout the year with a 1.4% rise in annual GDP. However, Wells Fargo anticipates an early 2024 slowdown followed by recovery, forecasting a 0.7% GDP increase.
Commonwealth Financial Network forecasts rapid expansion, expecting annual GDP growth at 3.75%. It envisions a “Goldilocks economy” with full employment, stability and mild inflation. Conversely, Vanguard analysts foresee overall GDP growth at 0.5%, with negative quarters in H2.
Economists highlighted diverse trends driving economic growth, notably the enduring consumer strength. BofA projected sustained consumer spending, albeit slower, as crucial for GDP resilience. Conversely, LPL Financial (NASDAQ:LPLA) foresaw a spending slowdown due to rising debt burdens and depleted savings.
Bottom Line
Consumer spending has remained buoyant due to record-low unemployment. December’s employment report marked robust hiring, keeping the unemployment rate steady at 3.7%. However, economists predict slower job growth, potentially nudging unemployment above 4%.
I’m of the view that these consumer spending numbers are generally strong, though debt-related weakness could become more pervasive in the years to come.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
