Are US consumers still spending as much?

Personal consumption drives the US economy, but with pandemic savings largely depleted, labour market resilience will play a larger role in the economy, especially for lower-income households.

The average personal savings rate has dipped below 4.5% of disposable income, making US consumer spending increasingly dependent on the strength of the jobs market.

Pandemic-era excess savings are almost gone. So, it should come as no surprise that US consumer confidence fell over the past 12 months, with the decline in sentiment concentrated in lower-income households. People on lower incomes have been hardest hit by surging prices, for rent and food especially, and higher interest rates. The toll of this financial stress on the most vulnerable households is plain to see in the sharp rise in credit card defaults, which are at their highest since 2010.

Consumer spending in the United States proved resilient in recent years with annualised quarterly growth averaging close to 3% over the past 24 months. But is it about to slow? It’s simply too early to tell.

Wealthier households are by far the main drivers of consumer spending in the US

It’s important to keep in mind that the top 20% income bracket accounts for around 40% of total consumer spending. These high-income households have also gained the most from the current favourable financial conditions as property and stock values have soared. The most recent jobs market data are still broadly on a solid footing, ensuring buying power will continue to grow. In the fourth quarter of 2024, labour income rose at a seasonally adjusted annualised rate of 5.9%, the highest increase since the third quarter of 2023. Finally, the tax cuts promised by the Trump administration (on overtime, etc.) should also help the American consumer.

Upward pressure on rates

The prospect of an economic policy likely to be positive for nominal US growth – but against the backdrop of worsening public finances – is putting pressure on treasury yields. The US 10-year yield (4.80%) rose by around 70 basis points over the last three months, nearing the 5% mark. While the scale of the rise is similar to 2016 when Mr. Trump was first elected, the level of yields is much higher today. Financial markets are pricing in more caution by the Federal Reserve with only one rate cut expected in 2025 – and not until September. The Fed’s cautious stance is boosting the dollar, which has just hit a two-year high against major currencies.

This upward spiral in yields will likely weaken the most cyclical sectors, such as real estate (the 30-year fixed-rate mortgage rate is now above 7%). On the markets, the equity risk premium, particularly in the United States, is contracting rapidly. Is volatility about to make a comeback?

Damien Petit
Sales Director, Private Banking