Falling Income & High Inflation Challenge American Consumers

Spending Slowdown

American consumers are the growth engine of the U.S. economy. That’s right, every time you swipe your credit card, you’re helping GDP growth. But conditions have been challenging for consumers.

In 2022, the median U.S. household income fell to $74,580 — a 2.3% drop from $76,330 in the prior year, according to the Census Bureau . It was the third straight year that average incomes fell. That doesn’t bode well for consumer spending in an environment of consistently higher prices. Even though the pace of inflation has leveled off from its highs, prices haven’t come down.

That said, the spending bonanza has continued so far, and the strength of consumer spending has calmed worries about a potential recession to some degree.

Bleak Outlook

Next year could spell the advent of different consumer behavior. More than 50% of respondents to a Bloomberg survey said their personal consumption will decline in early 2024. If this translates to lower spending across the board, it could be the first decline seen since the early days of the pandemic.

The high level of interest rates isn’t helping matters. Even though market expectations are low for another rate hike at next week’s Fed meeting, the central bank could still increase rates at future meetings. Any potential future hikes would further increase the cost of borrowing money, putting more pressure on consumers who are already budget-stretched.

Market Metrics

For months, fears of an economic downturn have been at odds with the stock market. Despite the recessionary concerns bubbling up, the stock market has steadily chugged along throughout the year. The S&P 500, the broadest measure of the U.S. stock market, is up more than 16% in the year-to-date. But, if consumer spending indeed slows down, it could hurt the market, too.

The post-pandemic economic environment remains uncharted territory.

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