Consumer Spending and US Economy
Amidst soaring interest rates and inflation, American consumers are showing resilience in their spending habits. Consumer spending accounts for approximately 70% of the US Gross Domestic Product (GDP). The surge in consumption during the COVID-19 pandemic has played a crucial role in sustaining robust growth in the US economy. Preliminary estimates indicate that the real GDP grew by almost 5% in the third quarter, marking the highest growth rate since the fourth quarter of 2021.
However, the pace of spending is expected to taper off as a result of dwindling consumer savings and escalating interest rates. According to FactSet, the real personal consumption expenditure (PCE) growth in the US is projected to be 2.2% this year, a decline from 2.5% last year and 8.4% in 2021. Nevertheless, the solid state of household finances, a resilient labor market, and wealth from substantial housing holdings suggest that American consumers still possess considerable spending power, thus averting a looming recession in the next year.
Olu Sonola, head of US regional economics at Fitch Ratings, stated, “Consumers are expected to continue driving growth in the US economy for the foreseeable future.”
Driving Force: A Strong Labor Market
A robust labor market has been instrumental in propelling consumer spending. Retail sales have seen a year-on-year growth of 3.1% in the past three months, while the current unemployment rate of 3.9% is nearly at an all-time low. Additionally, a majority of working-age Americans have a steady income. Wendy Edelberg, director of the Hamilton Project at the Brookings Institution, noted, “Consumer spending is thriving due to the very healthy labor market.”
Following the onset of the COVID-19 pandemic in the US in February 2020, several economic sectors, including the labor market, saw a steep decline. However, in 2021, spurred by the rollout of COVID-19 vaccines and government stimulus measures, non-farm employment witnessed a surge, with an average of 605,000 new jobs added each month.
Although job growth has slowed down to an average of 399,000 new jobs per month last year, it remains considerably higher than the estimated 100,000 monthly average jobs required to maintain a stable economy. Even as job growth has moderated towards more typical levels this year, the three-month moving average of job growth in October stood at 204,000.
Upward Pressure on Wages
Furthermore, job openings continue to rise compared to pre-pandemic levels. Data from the US Bureau of Labor Statistics reveals that in September, there were 9.6 million job openings, surpassing the end of 2019 figure of 6.7 million. With 1.5 job vacancies for every person seeking employment, the labor market remains highly competitive.
The abundance of job openings and low unemployment rates continue to exert upward pressure on wages. The latest employment cost index indicates that the wage cost of civilian workers surged by 4.3% year-on-year in the third quarter. While this is slightly lower than the peak of 5.1% in the second quarter of 2022, wage growth has outpaced inflation since May 2023. The substantial impact of rising wages on financial security and spending power cannot be overstated, given that wages constitute the majority of Americans’ total income.
Amid high interest rates and high inflation, American consumers continue to spend. Consumer spending accounts for about 70% of US GDP. The consumption boom during the COVID-19 epidemic has allowed the US economy to maintain surprisingly strong growth momentum. According to preliminary estimates, US real GDP grew by nearly 5% in the third quarter, the highest growth rate since the fourth quarter of 2021.
The increase in spending is bound to lose some of its steam as the effects of reduced consumer savings and rising interest rates are felt. FactSet estimates that real personal consumption expenditure (PCE) growth in the US will be 2.2% this year, down from 2.5% last year and 8.4% in 2021. However, relatively healthy household finances, a resilient labor market and wealth significant housing proves that US consumers still have plenty of firepower and that the US economy can avoid a recession next year.
“Consumers are expected to continue to drive growth in the US economy for some time,” said Olu Sonola, head of US regional economics at Fitch Ratings.
A healthy labor market has been a driver of consumer spending. Retail sales grew by 3.1% year on year in the last three months; the current unemployment rate of 3.9% is near an all-time low, and the majority of working-age Americans have a fixed salary. “Consumer spending is very strong because the labor market is very healthy,” said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution.
After the COVID-19 epidemic began to spread in the United States in February 2020, most economic sectors, including the labor market, declined sharply. But in 2021, fueled by the new crown vaccine and government stimulus measures, non-farm employment has exploded, with an average of 605,000 new jobs being added each month.
Although job growth slowed last year to an average of 399,000 new jobs per month, it was still more than three times the estimated 100,000 monthly average jobs needed to keep the economy stable. Job growth has fallen further this year towards more normal levels; however, in October, the three-month moving average of job growth remained at 204,000.
At the same time, job openings are still increasing compared to pre-epidemic levels. US Bureau of Labor Statistics data shows that the number of job openings in September was 9.6 million, although it was lower than the highest of 12 million in March 2022, it was higher than at the end of 2019. of 6.7 million. There are 1.5 vacancies for every person looking for a job.
A large number of job openings and low unemployment continue to put upward pressure on wages. The latest employment cost index shows that the wage cost of civilian workers increased by 4.3% year-on-year in the third quarter, although this is below the peak of 5.1% in the second quarter of 2022, wage growth has been higher than the rate of inflation since May 2023. Since wages make up the majority of Americans’ total income, rising wages have a significant impact on financial security and spending power.
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