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Consumer spending plays a large role in the U.S. economy and current data suggests the health of the consumer is deteriorating, which is a negative headwind for the overall economy.

Consumer spending has been equal to 65-70% of U.S. GDP since the mid-1990s.

Source: Macrobond.

This means that the health of the consumer, and their ability to continue spending, has a large impact on the growth of the overall economy.  Many consumer related indicators are heading in a negative direction.

Consumer incomes on a real and nominal basis peaked in dollar terms back in March of 2021.

Source: Macrobond.

Real personal consumption is still increasing, but the growth has dropped significantly, as costs have been rising and incomes have been slowing.

Source: Macrobond.

As incomes have declined and prices have increased, savings rates have declined.  The savings rate peaked at just under 34% after the initial fiscal payments and the start of COVID lockdowns and accelerated again to 26.5% following the March 2021 fiscal payments.  As of April 2022, the savings rate had declined to 4.4%, the lowest rate since September 2008.

Source: Macrobond.

With savings being mostly depleted, consumers have been turning to debt to help maintain spending power.  The total dollar amount of revolving consumer credit (credit cards) made a new high in April and exceeds the level reached prior to the start of COVID lockdowns.

Source: Macrobond.

The year-over-year growth rate in April was 13%, the highest rate since January 1997.

Source: Macrobond.

The monthly dollar increase in April was $17.8 billion, a very high number after what was a record increase in March of $25 billion.  The average monthly increase since 2000 (include months with paydowns/negative growth) is $1.8 billion.

Source: Macrobond.

A reduction in consumer spending growth and an overall slowing economy is starting to impact the labor market.  Weekly initial jobless claims have increased from a low of 166,000 in March to 229,000 at the beginning of June.  This is a low absolute number but is the highest level since mid-January and is a shift from the steady trend lower since mid-2020.

Source: Macrobond.

With all of these negative headwinds, it was not surprising that the most recent University of Michigan consumer sentiment index update made a new all-time low.  The current conditions component dropped 8 points, a new all-time low, from the last update, while the expectations component dropped 8.5 points to the lowest level since 1980.

Source: University of Michigan/Reuters.

The current trajectory of consumer related date suggests that spending will continue to decline on a real basis as incomes are slowing, prices are rising, and savings rates are low.  A rise in unemployment with elevated debt levels could create a credit problem in the consumer market which could have a negative impact on financial markets.  More weakness in consumer related data likely leads to more weakness in the overall economy.

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

 

Vice President, Research and Strategy
Boyd Watterson Asset Management, LLC

Joseph Khoury

Economic Analyst
Boyd Watterson Asset Management, LLC

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