Consumers Are Miserable, but Resilient
Americans are having a strange economic moment. We feel bad, really bad. The University of Michigan Consumer Sentiment Index fell to its lowest level ever recorded, as war in the Middle East caused all demographic groups across age, income, and political party to feel rotten, prior to the April 7th announcement of a temporary cease-fire. Yet spending remains surprisingly resilient. The Census Bureau reported that retail sales rose 1.7 percent in March, well ahead of the consensus estimate. Before you say "that was all about gas or cars", even when excluding autos and gasoline stations, retail sales still rose by 0.6 percent. In other words, despite feeling blue, whether about the war, gas prices, or anything else in life, consumers are still spending at a good clip.
How is that possible, especially as people are still coping with still high overall prices and now, surging costs for gas? The answer may be that although we collectively are still suffering the emotional hangover of the COVID-era inflationary spike, wages have actually accelerated, making it easier to absorb the costs of weekly expenditures. The big exception to wage gains keeping up is housing, where affordability has plummeted as interest rates rose and homeowner’s insurance skyrocketed, so let’s put that one area in the category of a legitimate grievance.
Ben Carlson of Ritholtz Wealth Management posits that in addition to wage gains, Americans are also richer. Assets (the stuff we own) have increased, propelled by a surge in both house and stock prices. The increase on the left side of the balance sheet has dwarfed consumer debt levels (the right side), which have climbed from $14.2 trillion at the end of 2019 to $18.8 trillion by the end of 2025. All of this is to say that net worth (assets minus liabilities) has been rising and as a result, is bubbling in the background for a lot of Americans as they make spending decisions on everything from travel plans to dining out to purchasing a new car. Carlson says that there are enough positives to outweigh the negative feelings, which is why all of the “predictions about a consumer slowdown this decade have been wrong up to this point.”
That said, Carlson acknowledges that not everyone is sharing in the balance sheet boom. Delinquencies on credit cards, student loans, and auto loans are creeping higher, trends that are worth watching closely. The saving grace, for now, is that foreclosures and bankruptcies remain low by historical standards. Although we continue to report feeling terrible, whether due to tariff uncertainty, energy price shocks, and housing affordability, U.S. consumers remain resilient.
Against the backdrop of this data, the Federal Reserve will once again take center stage with a two-day policy meeting. It is widely expected to hold interest rates steady at a range of 3.50 to 3.75 percent, despite fears that inflation could reaccelerate due to the Middle East war. It’s likely that Fed Chair Jerome Powell will signal that the committee is monitoring the situation and watching for evidence that war-related supply chain issues and price increases are spreading throughout the economy, but so far, that is not the case.
KPMG Chief Economist Diane Swonk notes that while the labor market is important, it is the inflation side of the Fed’s dual mandate that can “erode the foundation of an economy.” If consumers were already miserable, any sustained uptick in prices will devastate “those who can afford it least,” says Swonk. The danger of inflation is that it “is a disease that can spread and become chronic if not tamed.”