Slowing the Slowdown: A Story of the US Consumer

If the consumer is slowing the slowdown, is there a slowdown?

The US economy has stayed remarkably buoyant throughout 2023. The fastest Fed tightening cycle in history has slowed inflation while growth and labor markets remain strong.?With a surprising capacity for spending during this cycle, the US consumer has served as the lynchpin of this "soft landing." Indeed, the biggest theme at a recent banking conference Sage attended was the “resiliency of the consumer," which has been propped up by the seemingly unlimited Covid stimulus savings combined with a secularly strong labor market. ?

Notably at the conference, a Top 5 bank highlighted the fact that its lower-end consumers have two-to-three times the amount of deposits versus pre-pandemic levels – depositors who averaged $600 balances now have closer to $1800. ?

Another nontrivial support for spending has been the growth in credit card debt. Balances have grown as consumers have financed spending coming out of the pandemic. ?

Not all areas of the economy are as resilient as the consumer. Households continue to support economic growth, but certain commercial real estate sectors are struggling. The work-from-home paradigm shift has been a clear negative for office properties, while retail commercial properties have fared much better and now exceed 2019 levels.

Capitalization rates ("cap rates”), used to estimate return on real estate investments, are another clear signal of property type tiering in commercial real estate. Both retail and office cap rates rose throughout 2022 as the Fed began tightening policy. However, consumer resilience during 2023 has helped cap rates stabilize for retail properties while office properties continue to face operational challenges.?

Rising interest rates have also contributed to plummeting commercial loan growth. Higher loan standards have signaled that banks are less willing to make loans, while demand for loans has fallen as well. Recent bank credit analyst presentations have showed that commercial borrowers are using a decreasing amount of their revolving debt capacity and appear to be in a "wait-and-see" stance on the economy. Some banks see this trend starting to bottom out, but analysts aren't expecting drastic resurgence in loan growth.

Interest rate-sensitive sectors like banking and real estate have slowed in response to Fed policy.??

Without a tailwind from the corporate sector, a continuation of the economic expansion rests on the shoulders of the US consumer. It's no surprise that Fed Chair Jerome Powell has been keenly focused on labor market developments. As employment continues to rebalance from historic levels of labor shortage and labor hoarding, investors will continue to be laser-focused on any sign of jobs weakness to gauge the sustainability of the "soft-landing" outcome for the US economy.??

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