Consumer Crunch? Spending, Debt, Stagflation

Consumer Cracks

In the United States, the consumer is the economy. Consumer spending accounts for around two-thirds of U.S. GDP, so when spending falters, the economy is in a pinch.

That is why economists have been worried about the state of people’s wallets in the face of the high inflation Americans have been enduring. Even though the pace of inflation has come down, everything from fruit to cars remains more expensive.

So far, these worries haven’t come true. But analysts remain vigilant.

What Are the Data Telling Us?

The U.S. economy has remained incredibly resilient through 2023 on the back of robust spending. In the first quarter of this year, however, growth has lost steam, coming in weaker than expected at an annualized 1.6%, according to the Commerce Department’s first estimate . Even so, consumer spending was among the driving factors.

And then there are the reports from consumer goods companies and what they’re seeing on the ground: Several companies suggest there’s a slowdown in spending, which is particularly pronounced among lower-earning Americans. McDonald’s (MCD) recently noted its price hikes are driving more lower-income consumers to eat at home, while PepsiCo (PEP) also noted on its latest earnings call that this group of consumers appear stretched.

Credit card debt in the U.S. increased by $143 billion year-over-year in the fourth quarter of 2023, according to the New York Fed . Delinquency transition rates also rose for all forms of debt other than student loans.

What’s Next?

Since inflation spiked during the post-pandemic period, the Federal Reserve has wielded its blunt monetary policy tools to try to get it back under control. Simply put: The Fed raised interest rates to cool the economy. The pace of inflation has come down, but it’s still higher than the Fed wants it to be.

Last year, a lot of chatter focused on the concept of a “soft landing” — curtailing inflation without pushing the economy into recession. But with inflation still higher than desired, the worries have changed, too. If the economy should now meaningfully slow, the next worry is stagflation, a concept describing economic stagnation paired with high inflation.

For now, the Fed still says it will likely cut interest rates this year seeing inflation has come down a whole lot. The first such rate cut is expected over the summer. Analysts, investors, you, and me, will be sure to keep a close eye.

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