US consumers are doing well, and their resilient spending habits should help avoid a recession.
That’s true even despite concerns about dwindling surpluses and the imminent resumption of student loan payments.
These five charts show how resilient the US consumer is despite recession fears.
US consumers are doing well as they continue to spend despite high inflation and lingering fears that the economy will soon slide into recession.
Despite some commentators sounding the alarm, the U.S. consumer is not in imminent financial distress due to dwindling excess savings from the COVID-19 pandemic on top of student loan payments that will resume 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 data sets in the company’s semi-annual 2023 outlook report.
The consumer is important to track because approximately 70% of the US economy is driven by consumer spending, which is heavily dependent on the daily spending habits of more than 300 million Americans.
And the current data points to stronger trends today than before the pandemic.
Here are the top five charts that show how strong the consumer is, and why that strength should continue to protect the US economy from a looming recession.
1. Monthly debt payments are manageable.
“When we think about debt, the most important question is whether households will be able to service that debt,” says Detrick.
Enter the household debt service ratio, which measures the percentage of consumer income used to pay down all types of debt, from mortgages to credit card bills to student loans.
Based on JPMorgan estimates, the household debt service ratio stood at 9.7% at the end of the second quarter. That figure is well below the 13.2% seen in the fourth quarter of 2007, and also below the pre-pandemic average of 11.2%. That gives consumers plenty of room for maneuver to take on more debt if they need to, which would lead to more spending and help stimulate the economy.
2. Real income growth.
For most of the past two years, wage increases have failed to keep pace with rapidly rising inflation. But with inflation finally coming down and wage growth holding steady, that has changed. It means consumers end up having more money in their pockets, another good sign that should support the economy going forward.
“Disposable income has grown at an annualized rate of 10% in the first five months of this year. Meanwhile, inflation is only about 4%, meaning households are seeing real income gains,” Detrick said.
3. A healthy balance.
Consumers have $168.5 trillion in total assets compared to just $19.6 trillion in debt. That is a healthy balance and does not indicate a period of weakness ahead.
4. A strong labor market.
Ultimately, what matters is that consumers have a job, because that fuels most of their spending habits. If they have a salary, they spend money. So it’s no surprise how important the strength of the job market is to consumers, and right now the job market looks good, with plenty of open positions for those looking around.
“The employment-to-population ratio for workers in the highest age range (25-54 years), which is responsible for labor force participation issues and an aging population, now stands at 80.7%, which is higher than any time 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.
“Consumption continues to follow the pre-pandemic trend, even after adjusting for inflation… Spending driven by rising real incomes means that consumers do not feel the need to borrow as much as they did before the pandemic,” said Detrick.
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