Consumer spending has had a significant impact on the U.S. economy in 2023. While estimates vary, roughly 70% of U.S. economic growth is predicated on consumer spending; the other 30% comes from business capital expenditures, government spending, and non-American spending in the form of net exports. Now, in the absence of COVID-19 stimulus, consumers are taking on more debt, particularly in the form of student loans, auto loans, and other consumer revolving credit lines like increased credit card balances. The latter stands at an all-time high of approximately $1.01 trillion, while student loans have surpassed $1.50 trillion as the price of college continues to go up. Despite rising costs and interest rates, consumer spending has remained relatively strong, contributing to the resilient U.S. economic growth this year.
Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax
The University of Michigan conducts a well-respected survey of how consumers are feeling about their personal finances and the economy. As the chart below displays, the survey fell to a 43-year low in consumer sentiment in June of 2022 as inflation increased to multi-decade highs, leading the Federal Reserve to increase their policy rate 11 times (5.25 percent) since early 2022. As a result of the unprecedented rise in the federal funds rate, the equity and fixed income markets produced negative returns during 2022 (-18.3% and -12.88%, respectively).
Source: The University of Michigan Surveys of Consumers
Since hitting a low in June of 2022, there has been a positive change in sentiment as consumers adapted to price increases and continued to spend the “excess” savings accumulated during the COVID-19 pandemic. U.S. economic growth and consumer sentiment has been driven by several factors, including:
- Strong employment: The U.S. unemployment rate is at a near-50-year low, giving consumers more money to spend.
- Excess savings: Consumers built up a significant amount of savings during the pandemic. These savings have been a cushion against higher prices and have allowed consumers to continue spending. However, as the chart below shows, after rebuilding their savings over the last year, consumers have been saving less of their disposable income since early 2023.
Source: Bloomberg L.P.
- Pent-up demand: Consumers were unable to spend as much money as they wanted during the pandemic because of the widespread lockdowns and other restrictions. This has led to pent-up demand, which is now being released as restrictions have eased.
- Student loan moratorium: Since the COVID 19 pandemic the Federal government gave borrowers a pause on charging interest on their student loans—this relief period expired in September.
Oil & gas: Energy markets are dependent on supply and demand factors. On the demand side, economic growth, spurred by spending, has helped support the price of WTI crude above $80 a barrel at the time of this writing.
Retail: Retail sales have been strong in 2023, as consumers have continued to spend on goods and services. Note that retail sales have turned higher since bottoming in April of this year.
Source: Bloomberg L.P./BCIS
Restaurants and bars: Restaurants and bars have benefited from strong consumer spending.
Travel and tourism: The travel and tourism industry has rebounded in 2023 as consumers are eager to travel again.
Manufacturing: Manufacturing has also been propped up from strong consumer spending, businesses have increased production to meet newfound demand. Manufacturing isn’t robust at the moment, but it is holding steady as seen below in the latest manufacturing index data from S&P:
Overall, the U.S. consumer has almost single handedly supported the U.S. economy in 2023. Third quarter economic growth handily beat estimates (GDP quarter-over-quarter was 4.9 percent, versus expectations of 4.5 percent) as the economy grew at the fastest rate since Q4 of 2021. There are, however, mounting concerns that consumer spending may slow in the coming months due to the continued impact of (still high) inflation and higher interest rates, and that economic growth will grind lower as a result. Third quarter earnings so far have come in line signaling to us companies are having a harder time passing on costs to their customers.
As a result of these factors, we believe the economy will slow and possibly enter a recession in the next six to twelve months. Due to this belief, we continue recommending a more defensive or moderate risk posture in investment portfolios. If you would like to discuss further, please call your advisor and we will be happy to review the implications for your portfolio.
The views expressed in this publication are those of the author and do not necessarily reflect the views and opinions of Cetera Advisor LLC or Burrows Capital Advisors.
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