Three Reasons the U.S. Consumer Outlook Remains Strong

Despite a likely softening of the labor market, U.S. consumer spending should remain healthy for 2024.

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Welcome to Thoughts on the Market. I’m Sarah Wolfe from the US Economics Team. Along with my colleagues bringing you a variety of perspectives; today I’ll give you an update on the US consumer. It’s Monday, February 12, at 10 AM in New York.

Lately, there's been a lot of mixed data on the health of the US consumer. We saw a very strong holiday spending in November and December; very strong jobs reports in recent months. But we’re forecasting somewhat softer data in January for retail sales. And we know that delinquencies have been rising for households.

When we look towards the rest of 2024, we're still expecting a healthy US consumer based on three key factors.

The first is the labor market. Obviously, the labor market has been holding up very well and we’ve actually been seeing a reacceleration in payrolls in the last few months. What this means is that real disposable income has been stronger, and it’s going to remain solid in our forecast horizon. We do overall expect some cooling in disposable income though, as the labor market softens. Overall, this is the most important thing though for consumer spending. If people have jobs, they spend money.

The second is interest rates. This has actually been one of the key calls for why we did not expect the US consumer to be in a recession two and half years ago, when the Fed started raising interest rates. There’s a substantial amount of fixed rate debt, and as a result less sensitivity to debt service obligations. We estimate that 90 per cent of household debt is locked in at a fixed rate. So over the last couple of years, as the Fed has been raising interest rates, we’ve seen just that: less sensitivity to higher interest rates. Right now, debt service costs are still below their 2019 levels. We’re expecting to see a little upward pressure here over the course of this year – as rates are higher for longer, as housing activity picks up a bit; but we expect there will be a cap on it.

The last thing is what’s happening on the wealth side. We’ve seen a 50 percent accumulation in real estate wealth since the start of the pandemic. And we’re expecting to see very little deterioration in housing wealth this year. So people are still feeling pretty good; still have a lot of home equity in their homes. So overall, good for consumer spending. Good for household sentiment.

So to sum it up, this year, we’re seeing a slowing in the US consumer, but still relatively strong. And the fundamentals are still looking good.

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