US consumers have spent their way out of trouble, supporting growth and reviving the economy when it has been most needed. However, could this fabled strength about to become a weakness?
In the US, private consumption – or consumer spending – is important. Estimates suggest that it accounts for around 68% of Gross Domestic Product (GDP). Today, this is nearing the record high levels set in 2011, where it reached 69% of GDP. It was a primary engine of growth in the third quarter of 2023, rising 1.7%.1,2 And has been a key driver of the jobs' recovery.
However, there are signs that this strength may be starting to roll over. The current consumer confidence has its roots in two areas. First, the savings pot many investors built up during the pandemic. And second, strong jobs growth. And there are signs that both are weakening.
Pandemic savings spent
Around $2.1 trillion in excess savings was accumulated over the course of the pandemic, as the government distributed cash to protect households.3 However, that cushion of excess savings has since eroded, dwindling to around $500 billion by March, to $190 billion by June, and expected to be completely depleted at some point during the third quarter of this year.1 Where those savings remain – if they do remain – they tend to be concentrated in the highest quintile of households. Which may be why a report from McKinsey earlier this year revealed optimism about the economy to be highest among Baby Boomers but plummeting among Millennials.4
The US has more than likely by now exhausted its you-only-live-once summer of spending and is returning to reality.
The US has now largely exhausted its you-only-live-once summer of spending and is returning to reality. There are some cracks appearing in consumer spending data. And while we see many companies maintaining margins, increasingly this is at the expense of volumes. It is likely to become difficult to sustain this situation indefinitely. Consumers have a tipping point.
Buoyant labor markets
That said, most Americans still have jobs. The American model of consumption is such that while the jobs market remains buoyant, so does consumption. Until there are real difficulties in the labor market, consumption may hold up. The question is whether that weakness is starting to emerge. After all, the goal of the Federal Reserve in raising interest rates has been to calm the jobs market sufficiently to bring prices lower. With the unemployment rate having ticked up to 3.9% – the highest level since January 2022 – might suggest a discernible cooling in the labor market, even if we don’t expect a significant downturn.5
Unsurprisingly, the US consumer is also a significant part of the US stock market. The Michigan Survey of Consumer Sentiment was weak in October, falling for a fourth consecutive month and reversing all the improvement seen earlier this year (Chart 1).6 Even if US consumer sentiment further weakens, we believe there are still plenty of opportunities worth pursuing.
Chart 1. US consumer sentiment deteriorating in recent months
Source: abrdn, University of Michigan, Haver, as of November 2023.
Equally, within the consumer segment, we believe there will be specific areas of structural growth. Consumer groups in emerging markets are growing rapidly and can support mature businesses in other such markets.
We believe it remains possible to find high quality, cash-generative businesses with the potential to grow their dividends even in unpromising sectors. There may also be mispricing. We do not underestimate the power of the US consumer but do recognize that this is a moment for investors to be selective.
1 "United States - Private Consumption." Moody's, November 2023. https://www.economy.com/united-states/private-consumption.
2 "Excess No More? Dwindling Pandemic Savings." Federal Reserve Bank of San Fransisco, August 2023. https://www.frbsf.org/our-district/about/sf-fed-blog/excess-no-more-dwindling-pandemic-savings/.
3 "Americans have spent nearly all their excess pandemic-era savings, and the economy may suffer as a result." Fortune, August 2023. https://fortune.com/2023/08/16/americans-savings-nearly-depleted-sf-fed-study/.
4 "US consumers send mixed signals in an uncertain economy." McKinsey, April 2023. https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/us-consumers-send-mixed-signals-in-an-uncertain-economy.
5 "U.S. Wage Growth Cooled in October." The Wall Street Journal, November 2023. https://www.wsj.com/livecoverage/stock-market-today-dow-jones-11-03-2023/card/u-s-wage-growth-cooled-in-october.
6 The Michigan Survey of Consumer Sentiment is a monthly survey conducted by the University of Michigan that measures how consumers feel about the economy, personal finances, business conditions, and buying conditions.