The State of the US Consumer

The latest?Survey of Consumer Expectations (SCE) from the Federal Reserve Bank of New York, released on October 15th?covering September, offers a comprehensive view of how US consumers are navigating economic challenges, from inflation to job prospects to household finances. The survey signals that inflation expectations are creeping upward over time, and while Americans remain cautiously optimistic about the labor market, they are bracing for financial strain as debt delinquencies are expected to rise. Here’s a breakdown of the key findings and what they could mean for the broader US economy.?

Inflation Expectations: A Warning Signal?

Inflation continues to be a significant concern for consumers, especially in the medium and long term.?One-year inflation expectations?were steady at?3.0%, but expectations for inflation at the?three-year?mark rose from?2.5% to 2.7%, and at five years, they ticked up from?2.8% to 2.9%.??

While the persistence of inflation expectations could have knock-on effects of reducing consumer demand or changing the course of dovish Fed policy, "hard data" economic readings continue to show slower inflation growth, which makes inflation less of a threat in the near term. If data were to continue to surprise to the upside over the next few quarters, however, inflation could rise to the fore as a challenge in 2025.??

Labor Market Sentiment: Confidence Coupled with Volatility?

Despite inflationary concerns, Americans remain optimistic about the job market:?

• The likelihood of?finding a new job?after losing one increased slightly to?52.7%, indicating confidence in labor mobility (though this figure remains below its 12-month average).?
• The?voluntary job-leaving rate — the perceived probability of quitting one’s job in the next 12 months — increased, to?20.4%, particularly among workers under 40.?

The labor market’s resilience is a positive sign for the broader economy. A confident workforce is more likely to continue spending, which supports economic growth. However, wage growth has lagged inflation expectations, with?expected earnings growth?slipping to?2.8%.?This imbalance could lead to stagnant wage growth and contribute to potential labor market cooling.?

Rising Delinquency Expectations?

Perhaps the most alarming trend from the survey is the continued rise in?debt delinquency expectations, with?14.2%?of respondents expecting to miss a debt payment in the next three months, the highest level since April 2020. Notably, this spike is most pronounced among higher-income households earning over $100,000 and those aged 40 to 60 years old.?

As debt burdens grow, credit delinquencies may increase, prompting banks to tighten lending standards and limit credit availability, especially for riskier borrowers. This could weaken consumer spending and business investment. However, this trend hasn't materialized yet. The survey shows improved credit access, with more households reporting better conditions than a year ago, and expectations for easier credit over the next year, reaching their highest level since May 2020, signaling optimism for more accessible borrowing.

A Balancing Act for the Fed’s Rate Policy?

As we look ahead, the data from the September Survey of Consumer Expectations provides valuable insight into the challenges facing US consumers. Rising inflation expectations in the medium and long term, coupled with increased debt delinquency forecasts, suggest that while the immediate threat of runaway inflation has subsided, financial strain is still building. Consumers are feeling confident about the labor market, but more households are signaling concerns about their ability to manage debt.??

Unrelated to the NY Fed survey, retail sales surprised to the upside in September and remain strong. Retail sales have grown steadily this year, and they increased by 0.7% in September when excluding autos and gasoline.?

This creates a complex environment for the Fed as it weighs the pace of?rate cuts. While slowing inflation growth may offer some room for rate cuts in 2024, the upside surprises to economic data?complicate the decision. If inflationary pressures continue to build, particularly in the medium term, the Fed may need to modify its pace of cuts to avoid reigniting inflationary spirals.?

On the other hand, if consumer debt continues to rise and delinquencies become a larger issue, the Fed may be forced to act to ease financial conditions, cutting rates to prevent a broader economic slowdown. Balancing inflation control with support for consumers and businesses will require a delicate approach, particularly as credit access trends fluctuate and wage growth remains tepid.?

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