The resiliency of the U.S. consumer over the last year in the face of sharp increases in interest rates has been a surprise to most. Not only has the unemployment rate remained exceptionally low, but consumer confident has recently been rising again. However, spending is already starting to moderate and in the coming quarters we anticipate this activity to slow further to the point where a mild recession is more likely than not—i.e., we may not be in for as clean an escape, or an “immaculate disinflation” back to 2% inflation and no recession, as the market currently anticipates. Given that the behavior of the consumer is key to this narrative, we re-examine what have been the main drivers of consumer spending over the last few years, and what those drivers might look like in the quarters ahead.

In short, there is no question that the consumer has been surprisingly resilient over the last year. However, sentiment on the current and expected future position of consumers among analysts and investors is now decidedly mixed. Some still see the consumer in great shape, others are extremely worried and see their situation as precarious at best.

We view spending as being built on the foundations of income, savings, credit, and confidence. While the employment situation continues to be strong and it is certainly encouraging that real income growth is now positive again, we are also starting to see evidence of slowing in the labor market.

This suggests that we have likely passed the peak in improvement and activity will increasingly deteriorate in the coming quarters. The excess savings will similarly be gone by year-end/early 2024, and credit is becoming increasing scarce for those that want to borrow. Meanwhile, the improvements in consumer confidence have been encouraging, though we are cautious about how much of this may still be related to post-pandemic euphoria, which fades after the summer is over and revenge travel is done.