Key takeaways
In 2024, personal consumption expenditures represent nearly 68% of the nation’s GDP.
A solid job market, low unemployment and wage increases help support consumer spending and a growing economy.
However, household debt is rising, with total credit card debt in the U.S. now topping $1 trillion, a record threshold.
The U.S. economy continues to demonstrate a durable resilience in the face of higher interest rates and persistent inflation. Second quarter Gross Domestic Product (GDP), the primary measure of the nation’s economic activity, grew at an annualized rate of 2.8%, doubling first quarter GDP growth of 1.4%, while also outpacing 2023’s 2.5% GDP.1
Consumer spending is the main driver of U.S. economic growth. Over the three months ending in July, retail sales grew 2.4%. The biggest gains were in electronics and appliances, which showed a 5.2% improvement from July 2023, reflecting a willingness among consumers to spend more on big ticket items.2
“The impressive retail sales report is a good start to the third quarter,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “It shows that consumers remain resilient. They are doing so by saving less while maintaining a solid rate of spending.”
“The impressive retail sales report is a good start to the third quarter,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “It shows that consumers remain resilient. They are doing so by saving less while maintaining a solid rate of spending.” Haworth says a strong labor market accompanied by competitive wage gains has helped consumers continue to contribute to the ongoing economic expansion.
How long can consumers maintain spending at a level that keeps the economy growing? Consumer confidence surveys provide an indication of consumers’ expectations and attitudes, and the most recent data offers mixed signals. The University of Michigan’s Consumer Sentiment Index trended higher in July and August but is modestly down from the same point in 2023.3 Similarly another measure of consumer confidence, from the Conference Board, rebounded in July after a lower reading in June, but hasn’t changed significantly in two years.4
In 2024’s first quarter, personal consumption expenditures represented nearly 68% of the nation’s GDP.1 Much of that spending requires financing, some for bigger ticket items like homes, automobiles and higher education and some in the form of credit card debt for day-to-day purchases.
An increasing proportion of spending is funded by consumer debt. In the second quarter of 2024, total household debt in the U.S. reached a record high $17.8 trillion. This represents a 4.3% increase over the amount of debt held one year prior.5 While debt levels bear close watching, they may not yet be a significant problem. “While we’ve seen a modest rise in delinquency reports, representing people not keeping up with debt payments, it’s not yet at a concerning level,” says Haworth.
Household savings rates have fallen off from their unusual COVID-19 pandemic-era peaks in early 2020, when they reached a level of close to one-third of disposable personal income. As of June 2024, the personal saving rate was 3.4%, down from a recent high of 3.9% in May.6 “Something closer to 6% is considered typical,” says Haworth. “With savings mostly depleted, the strong labor market, featuring low unemployment and solid wage growth, is helping consumers maintain higher spending levels,” says Haworth.
Can consumers remain in a position to fuel ongoing economic growth in the face of persistent – albeit retreating – inflation and higher interest rates? What are the potential economic and capital market implications?
Consumers may be borrowing at a record pace, but the upward trend of overall borrowing has been gradual. Of all major debt categories, credit card debt is growing the fastest. Total U.S. credit card debt topped $1 trillion for the first time ever in the second quarter of 2023 and continues to move higher, increasing 10.7% for the one-year period ending June 30, 2024.5
While borrowing is on the rise, Haworth cautions that some perspective is helpful. “Consumers today aren’t on a borrowing spree, but borrowing up to a point where it makes sense for them.” As shown in the chart below, through 2024’s first quarter, household debt service payments represented, on average, less than 10% of disposable personal income. While higher than the recent low point of 8.3% in early 2021, it is far below recent peak levels in 2007 and 2008, when debt amounted to more than 13% of disposable income.7
“Following the global financial crisis (from 2007-2009), it appears consumer attitudes and behaviors toward indebtedness have changed,” says Haworth. “Unlike the previous era, consumers today are not so overextended that they will have a hard time paying off debts.”
“Non-mortgage debt is back to pre-pandemic levels relative to income, but not yet anything of concern,” says Matt Schoeppner, senior economist at U.S. Bank. “Mortgage debt is still reasonable by recent standards, even with the spike in mortgage rates.”
The jobs market heavily influences consumer spending habits. “For now, the labor market remains robust,” says Haworth. A key number to watch is the report on initial weekly jobless claims. The measure rose to 265,000 in June 2023, but has been lower since, most recently at 227,000 new jobless claims for the week ending August 10, 2024.8 “It will become more concerning if initial weekly jobless claims consistently rise above 300,000,” says Haworth. “While the unemployment rate has nudged higher in recent months (to 4.3%),9 that’s partly due to the labor force participation rate rising, which is a positive economic development.”
The Federal Reserve (Fed) has indicated it is increasingly focused on labor market strength, along with its emphasis on reducing inflation. With today’s inflation rate, as measured by the Consumer Price Index (CPI), dropping below 3%,9 investors now anticipate the Fed will begin cutting interest rates in September 2024. “We’ll see whether lower interest rates, when they occur, encourage more consumer spending,” says Haworth.
What is the risk of consumers spending beyond their means in the coming months? Haworth is watching two key indicators:
It’s important to consider the current economic outlook as you evaluate your own portfolio of investments. Talk to your wealth planning professional to assess how your portfolio can be best positioned, keeping in mind current market dynamics and your long-term financial goals.
Consumer spending is by far the biggest driver of the economy. For example, according to the U.S. Bureau of Economic Analysis, in 2024’s second quarter, personal consumption expenditures represented nearly 68% of the nation’s Gross Domestic Product, or GDP,1 the primary measure of the size of the U.S. economy. That number demonstrates the important impact consumers have in determining whether the U.S. economy is growing or shrinking.
According to recent data, consumers are taking on an increasing amount of debt. But wages are rising as well, and savings rates have improved from recent low levels. It indicates that while there is significant consumer debt ($17.8 trillion as of June 30, 2023, according to the Federal Reserve Bank of New York), the level of debt seems manageable. According to the U.S. Federal Reserve, household debt as a percent of disposable income is less than 10%, well below levels that topped 13% in 2008.
According to the Federal Reserve Bank of New York, total household debt now stands at $17.8 trillion. While this is a record sum, U.S. household debt as a percentage of disposable income is less than 10%, well below the highest levels reached during the financial crisis of 2008-2009, according to the U.S. Federal Reserve. Consumers can reasonably take on debt provided they have reliable income that can be expected to continue without interruption, (i.e., no job layoff). In the current job market, with the unemployment rate at 4.3% (according to the U.S. Bureau of Labor Statistics), consumer debt is believed to be at a manageable level.
Set against the backdrop of persistent inflation, the strong job market continues to draw the attention of the Federal Reserve as it calibrates monetary policy to help curb inflation.
The Federal Reserve is focused on fighting inflation with monetary policy intended to slow consumer demand. Does this put the economy at risk of a recession?
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