Is a new recession warning flashing? You may have heard that consumers are the backbone of the U.S. economy. Indeed, consumer spending accounts for nearly 70% of economic growth.
Consumer spending has been the engine of the pandemic recovery and has played a large part in calming recession fears. As long as Americans still spend on things like cars, houses, celebrations, and trips, they create a significant tailwind against recession risks.
The latest data shows that consumer spending may be slowing. While Americans went big on “revenge spending” on vacations, concerts, and the in-person experiences we missed out on during the pandemic years, the party may be winding down.
There are a few seasonal reasons that could explain the slowdown. Students have returned to school, and summer vacations have mostly wrapped up. Student loan repayments begin next month for millions of Americans.
However, analysts think some bigger trends could be at work, potentially foretelling a spending deceleration. Americans are drawing down their post-pandemic savings at a rapid rate. At the same time, it’s getting harder to access credit. According to a summer survey, rejection rates for credit applications (including credit cards, auto loans, and mortgages) have increased sharply in the last few months, especially for people with lower credit ratings.
Fortunately, there’s a bright spot that could help prop up spending. Income growth is finally outpacing inflation. That means Americans have more money in their wallets after inflation. That’s good news for spending.
The Federal Reserve’s decision on September 20 to hold interest rates where they are – yet keep them high for longer – is an important backdrop to these trends and the stock and bond markets. We will continue to study these areas as they relate to our long-term investment approach.