JD Hayward
The state of US consumers matters to investors worldwide for many reasons, and right now, warning signs are emerging that could test their resilience as the biggest contributors to the US GDP, ultimately determining the outlook for the world’s largest economy and global financial markets.
The Butterfly Effect: The far-reaching impact of the US consumer
The concept of the Butterfly Effect suggests that small actions can have far-reaching consequences. In the realm of global economics, the US consumer is no mere butterfly—it's an eagle with a wingspan that spans continents. The sheer size of the US becomes apparent if you consider that California alone would boast the world's fifth-largest economy, with Texas and New York following at eighth and 10th, respectively.
This economic dominance means that when US consumers, who contribute 67% to the US economy’s growth, alter their spending habits, whether due to interest rates, inflation, or changing confidence levels, the effects are felt worldwide. Thus, the old adage is true: when the US economy sneezes, the world catches a cold.
The current state of the US consumer: A mixed picture
Recent economic indicators paint a complex picture of the US consumer's health. On the one hand, several factors suggest strength, potentially fuelling continued economic growth and market optimism. These include:
1. A robust job market with low unemployment rates
2. Inflation-beating wage increases
3. Strong GDP growth (2.8% in Q2 2024)
4. Solid retail sales growth (2.4% year-over-year in Q2)
5. Rising consumer confidence hitting a one-year high
6. Strong household balance sheets, buoyed by increased house prices and strong equity market gains, could support bullish sentiment for some time.
Source: Federal Reserve Bank of St. Louis
However, some warning signs are emerging:
1. A slight uptick in unemployment rates to 4.3% from 3.5% a year ago.
2. Downward revision of job additions (800,000 fewer jobs added in the 12 months to March than initially reported) indicates that the labour market, while by no means weak, might not have been holding up quite as well as initially thought.
3. Depletion of pandemic-era savings as consumers turn to bad debt (credit cards) to maintain their spending levels.
4. Rising household debt, especially credit card debt, which is increasing much faster than all other debt segments.
5. Credit card default rates are increasing as higher borrowing rates start to bite.
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