Almost 70% of U.S. economic activity comes from consumer spending. Let’s check in on the state of the consumer using a framework that doesn’t require a PhD in economics and/or a supercomputer by assessing the ability and willingness to part with our money.
Can We Spend?
Three factors help determine the ability to spend. The first is access to capital because most large purchases are done on “credit.” Consumers buy homes using mortgages and cars with auto loans. The easier it is to borrow cheaply, the more stuff we buy.
The chart below shows that financial conditions have eased this year (rising green line on the right). Meaning, access to capital and the affordability of that capital have improved. Mortgage rates remain high relative to the last decade, but if the Fed cuts interest rates next month, expect these conditions to ease further and promote even more spending.
The second factor is debt affordability. The chart below shows that the disposable income going toward interest payments rose from 2022-2023 but was still well below the 2000s. This trend reversed late last year and has stabilized for now.
The third factor is profitability. For consumers, wage growth is our preferred measure, and it’s been higher than inflation for over a year. This is important because it equates to real wealth creation.
The chart below aggregates the impact of these three factors. Household net worth is almost eight times higher than disposable income. Simply put, spending capacity (ability) is near an all-time high.
Do We Want To Spend?
Just because we have money does not mean we will part with it. Three factors help gauge our willingness to spend.
The first is consumer confidence. The more confident we are, the more willing we are to spend. Confidence increased in July, but not enough to break free of the narrow range that has prevailed over the past two years. Consumers still appear concerned about rising prices, high interest rates, and possibly even the Presidential election.
The second factor is the state of the job market. The more confident we feel about our job prospects, the more we spend. The chart below shows that job openings have fallen (blue line), but the unemployment rate (red line) has barely moved.
This trend indicates a healthy job market because the jobs being eliminated are helping cool inflation without driving the economy into a recession. Currently, there are 1.2 jobs available for every person looking, which is close to the long-term average.
The third factor is the recent performance of financial assets (stocks, bonds, real estate, etc.). Wealthy consumers account for most of the spending and own most of the financial assets.
Hence, their attitude towards spending tends to correlate with what they already own. If asset prices are strong, so are their net worth and confidence about the future. Thanks to a massive rise in stock, bonds, gold, real estate, cash investments, and most other tangible assets, there appears to be no slowdown in consumers' willingness to spend.
For example, the chart below shows that a record number of travelers (red line) have passed through TSA checkpoints this year. Air travel is one of the best indicators of discretionary spending and willingness to spend because we typically travel for fun and when we feel good about our financial situation. Furthermore, buying a plane ticket usually leads to spending even more
on hotels, souvenirs, dinners out, etc.
The Bottom Line
Not all consumer data is positive. Credit card balances and delinquencies have risen since 2021, many consumers have shifted spending habits to accommodate higher prices for necessities, and the job market isn’t great for everyone.
But it’s rare to have a period when all data is positive, and ironically, when they do occur, prepare for the worst. At any other time, there will be good and bad data on almost every aspect of the economy. The real question is whether the tailwinds pushing the economy forward are stronger and will last longer than the headwinds slowing it down. This isn’t easy because not all data carry the same weight.
The factors used to determine the ability to spend are all quantitative. They use “hard” data (things that can be counted) and are more reliable. Those for the willingness to spend are qualitative. They rely on “soft” data (often surveys) and are less reliable because they are prone to statistical errors and inconsistent emotional responses that can change fast. For example, the recent mixed consumer confidence data (soft) heavily contradicts retail sales data (hard).
Fortunately, of the two, the ability to spend is most important because this almost always lays the groundwork for longer-term trends. For example, if a consumer wants to spend but can’t because their credit cards are maxed out, their desire to spend is moot. But if a wealthy consumer chooses not to spend, they at least have the option down the road.
The bottom line is that the U.S. consumer, in aggregate, is spending, and little data suggests this will slow down materially anytime soon. But don’t just take my word for it. The final chart below shows that sentiment around the consumer from some of the largest retailers in the country remains quite positive.
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.