Consumer spending has been a stalwart of the U.S. economy, defying recession forecasts in 2023 and showing resilience amidst persistent inflation and historically high interest rates. However, recent indicators suggest a gradual slowdown in spending as we progress through 2024, with lower-income households expected to feel the brunt more than their higher-income counterparts.
According to Oxford Economics, a combination of slower real disposable income growth, a cooling labor market, higher tax burdens, and ongoing inflationary pressures contributed to a dip in spending during the first quarter. Economists at Oxford foresee this trend continuing into the latter half of the year, albeit at a moderated pace compared to previous years.
Michael Pearce, Deputy Chief US Economist at Oxford Economics, noted concerns over weakening personal income and spending figures, coupled with downward revisions in consumption growth. He emphasized that while consumer spending is moderating from its robust levels last year, the slowdown is anticipated to be gradual.
Wells Fargo and BMO Economics have also adjusted their forecasts downward, underscoring expectations for subdued spending momentum. Wells Fargo revised its estimate for second-quarter consumer spending growth to 1.9%, reflecting a cautious outlook amid economic headwinds.
Scott Anderson, Chief U.S. Economist at BMO Economics, echoed these sentiments, highlighting that income and demand growth moderation will likely persist throughout the year, influencing overall economic performance.
Recent data from the Census Bureau revealed a modest 0.1% increase in retail sales in May, falling short of economists’ projections. Additionally, April’s sales figures were revised to reflect a 0.2% decline, signaling softer consumer activity than initially reported.
While middle- and high-income households continue to bolster consumer spending, supported by resilient household balance sheets, younger and lower-income households face greater financial strain. Many of these households missed opportunities to build savings during the pandemic and now rely heavily on a robust labor market to sustain spending levels.
Jeffrey Roach, Chief Economist at LPL Financial, warned that businesses should prepare for reduced consumer spending on discretionary items such as recreation, dining out, and travel, as well as fewer major purchases financed through credit.
Meanwhile, the Federal Reserve remains vigilant, having raised interest rates significantly to curb inflationary pressures. Federal Reserve Governor Adriana D. Kugler highlighted that the impact of these rate hikes is evident in consumer spending patterns, particularly affecting purchases of durable goods like vehicles.
As the U.S. economy navigates these challenges, policymakers and economists will closely monitor consumer behavior to gauge the effectiveness of monetary policies in controlling inflation while sustaining economic growth.
