Earlier this year, there was a lot of conversation about the strength of the U.S. consumer. As sticky inflation and a slowing job market gave rise to stagflation fears, consumer spending was heavily cited as the engine driving continued economic growth and staving off recession risks. Consumption is critically important to the economy, contributing between 66%-68% of GDP growth each quarter since 2001. A strong consumer is a key contributor to healthy economic growth, so investors and economists pay special attention to new data providing insights into consumption trends.
Fast forwarding to today, investors are more in the dark about consumer strength due to the data blackout from the government shutdown. Now that data is set to begin flowing again, it’s important to understand where consumption data stands today and what tailwinds and headwinds consumers face moving forward.
The Consumer is Starting from Strength
Heading into the shutdown, consumer data remained steady. Real Personal Consumption Expenditures (PCE), which measures broad spending and is the consumption input into the Real GDP calculation, bottomed in Q4 2022 and has been in a slow but steady uptrend since:
Source: Factset
The same can be said for retail sales, which reflect consumer demand for finished goods and services, such as foods and beverages, autos, general merchandise, and gasoline:
Source: Factset
Even more encouraging is that within these categories, discretionary spending is increasing, and providers of these products are reporting strong earnings. Discretionary items are those that are deemed non-essential, and consumers purchase these products with money left over after necessities like rent, insurance, and utilities. Strong discretionary activity indicates consumer strength, and discretionary weakness is typically seen as a leading recessionary indicator (which is why Consumer Staples stocks sometimes gain when recession fears spike). On September 30th, analysts were expecting the Consumer Discretionary sector to struggle in the third quarter earnings season, projecting -2.4% year-over-year growth. As of this writing, with 92% of S&P 500 companies reporting, the sector has reported +7.9% YoY earnings growth – vastly outperforming expectations. Additionally, Bank of America recently found that spending on discretionary services has been in an uptrend since early 2024:
Source: Bank of America
Another positive signal for the consumer is median wage growth, which has outpaced CPI inflation since the beginning of 2023:
Source: FRED
As we enter the holiday season, which tends to have strong seasonality for consumer activity, broad U.S. consumption is coming from a place of strength. Of course, there are many headwinds facing consumers as well – here’s what we’re keeping an eye on.
A Few Things We’re Watching
A more recent trend that we don’t like: Americans are saving less. Personal savings recovered fairly quickly from 2022 lows and returned to the historical average of ~6% of disposable income, but have recently fallen below average again and are trending lower. While lower savings have likely contributed to the positive spending data, consistently falling savings are a negative sign for future spending. However, analysts are expecting the 2026 tax refund season to return a significantly higher amount of cash to certain filers due to the retroactive tax provisions in the OBBBA, which could help to right this trend.
Source: Factset
Something else we’re keeping an eye on is consumer debt, especially credit card debt, which has surged to a record $1.2 trillion in recent months. Making a difficult situation worse, the interest rates assessed on credit cards have spiked in recent years as well. 46% of credit cardholders carry a balance, meaning they do not pay in full each month and therefore pay interest. These consumers are facing soaring interest rates on record high amounts of debt outstanding, applying severe pressure to those applicable:
Source: FRED
Finally, a data point that’s been in the news recently is consumer sentiment, which has fallen back to near all-time lows. Rising costs, a cooling labor market, high interest rates, and other external factors have consumers wary of what lies ahead.
Source: FRED
While sentiment is an important indicator to watch, we make sure to take these reports with a grain of salt for two reasons. First, sentiment is among the most volatile of data points we have, because consumers can react viscerally and emotionally to short-term market, economic, or geopolitical shocks. Both extremely positive and extremely negative sentiment can turn on their heads with new information, so we make sure not to place too much weight into individual readings. Second, sentiment does not have a significant correlation with future spending. Americans like to spend money, and they usually continue to do so even when they don’t feel as positive about it.
Several key consumer data points will come out in the coming weeks which will give us more insight into the strength of the consumer. We will be watching them closely and keeping an eye on the risks the consumer faces, but we remain generally optimistic about consumption heading into the new year.