The State of the US Consumer

This week we received quite a few important macro data pieces that give us important clues about the strength of the US consumer. We look at 4 factors that tell us how strong the US consumer may be:

1. Spending Patterns
2. Wages and Labor Stats
3. Cash Balances
4. Distribution

1. Consumer Spending continues to remain robust

Starting off with the US Real GDP Growth number. While we saw overall GDP growth slow QoQ, from 3.1% to 2.3%, Real Personal Spending growth actually increased significantly from 3.7% to 4.2%.

Next up we got the monthly and yearly PCE Inflation numbers. MoM PCE increased by from 0.1% to 0.3% and YoY PCE increased from 2.4% to 2.6% in December. Now we know that PCE or Personal Consumption Expenditure is a measure of how much US households spend on goods and services. So, it stands to reason that US spending patterns remain robust.

We can also look at retail sales numbers. In December, overall Retail Sales YoY dropped marginally from 4.1% to 3.9%. The biggest contributor to the drop was Building Materials, followed by Non-store Retailers and Departmental Stores. However, we did see increases around staples (Grocery & Healthcare) and some of the bigger discretionary items such as Autos, Furniture, Electronics & Appliances, and Sporting Goods and Hobbies. So there is a balance of spending patterns here, and if we look at a slightly longer term trend, what we see is that Retail Sales have been seeing somewhat of a more stable trend.

2. Wages, Income, and Savings are starting to decline

It’s no secret that the labor market continues to remain resilient. The Unemployment Rate has increased over the past two years but at a very gradual rate. Part of the increase in the unemployment rate is attributed to the labor market actually coming into better balance. During Covid, companies had laid off too many workers and then there was a period when people didn’t want to go back to work, so demand was far higher than supply. Then there was a period of over-hiring and now we’re finally seeing some of those supply and demand issues balance out.

As for wages, after a period of initial stagnation after Covid, we’ve seen wages increase substantially. A major part of that was trying to entice people back to the workforce, while a more minor part was coping with inflation.

The best way to look at this is through the Quarterly Employment Cost Index (ECI).

On a YoY basis, the December quarter showed the ECI at 3.8% down from the peak of 5.1% in late 2021. While we have come far down from the peak on a YoY basis, we still remain far above pre-pandemic levels. This suggests that wages also remain sufficiently supportive of the US consumer and the resulting spending patterns that we are seeing.

However, when we look at the change in Real Disposable Personal Income and the Personal Savings Rate, we see a slightly different picture. Both have been gradually reducing in the past two years.

When coupled with the reduction in the Employment Cost Index, this does give us some troubling indications of how strong the consumer may remain, if this pattern continues.

3. But US Households are Wealthy and remain cash rich!

While regular earnings are decreasing, the reason we still see the US Consumer as fairly resilient is the household balance sheet. US Households had $190T in Assets, with only $20.9T in liabilities as of Q3, 2024, resulting in a net worth of $169T.

The amount has increased significantly in the past 15 years and the largest changes we’ve seen stems from Corporate Equity Holdings. So the stock market plays a big part in the wealth of the consumer.

We can then look at the actual cash balances of US households. As of Q3, 2024, the US Household had a whopping $18.2T in cash balances!

• Checking Accounts = $4.3T
• Savings Accounts = $9.8T
• Money Market Funds = $4.1T

TOTAL = $18.2T

This gives US Households a sizable cushion even if earnings are gradually normalizing.

4. The Distribution of Wealth continues to remain uneven

But, let’s also acknowledge that all of this wealth and cash balances are not evenly distributed. If we look at the distribution of wealth, it’s clear that the US still continues to have a K-shaped economy where the distribution of wealth is becoming even more uneven in relative terms.

The bottom 50% of Households account for only 2.4% of the overall wealth. It’s disheartening by many measures!

Bottom line:

The US Consumer is still cash rich with an estimated balance of USD 18.2T, and that largely supports the 4.2% quarterly increase in spending that we saw in the December. US Households had $190T in Assets, with only $20.9T in liabilities as of Q3, 2024, resulting in a net worth of $169T.

However, it’s important to also acknowledge that wages and income are decreasing in relative terms. The Employment Cost Index has declined to 3.8% during Q4, 2024 down from a peak of 5.1% in late 2021. Therefore, these robust spending patterns may not continue unless we see prices stabilize.

It’s also important to acknowledge that the US still has a K-shaped economy where the top 25% is largely skewing the “cash richness” of the data, while the bottom 50% account for very little of Household Wealth and continue to struggle with increasing prices.

Closing Thoughts - Eventful Weekends, Ugly Monday Mornings

“Headline risk” - a term I haven’t had in a while is making a big comeback. With President Trump’s tweets, and flurry of executive decisions, we’re in quite uncertain times. Most importantly, the weekends seem to have become very busy. There’s always something going on.

This weekend, it’s the tariffs. Keeping his word, President Trump levied tariffs of 25% on Canada, and Mexico, while China got hit with a 10% tariff.

Twitter (or X) reports that President Trump has threatened that any retaliation from these countries will be hit by a doubling of the tariffs.

We’ll see where all of this lands, but we’re likely going to see a risk-off scenario when markets open. The impact of the actual tariffs is one thing but the bigger impact comes from all the uncertainty, retaliation, and potential for trade wars.

Have a safe trading week out there!

None of the above is investment advice. For more information, please visit www.macrovisor.com