Key takeaways

  • In 2024’s first quarter, personal consumption expenditures represented nearly 68% of the nation’s GDP.

  • A solid job market, low unemployment and wage increases help support consumer spending and a growing economy.

  • However, total credit card debt in the U.S. topped $1 trillion for the first time ever in the second quarter of 2023 and surpassed that record again in the 3rd and 4th quarters last year.

Consumer spending is firmly in the spotlight as economists and investors consider the economy's trajectory this year.

Although retail sales declined in January, they recovered solidly in February and March. Much of March’s gain could be attributed to higher gasoline prices boosting total gasoline receipts, but e-commerce retailers also generated strong growth.1

Increased consumer spending helped propel the U.S. economy to grow by an annualized rate of 1.6% in 2024’s first quarter. Spending on goods during the period was relatively flat, but services spending grew solidly.2

Consumer attitudes provide some guide to what might lie ahead in terms of actual spending. Consumer sentiment is holding at higher levels today than was the case for much of 2023. The University of Michigan’s Consumer Sentiment Index was 21% higher in April 2024 from a year earlier, but the number has held relatively steady for three months.3 However, an alternate measure of consumer confidence from the Conference Board tracked three consecutive months of decline in early 2024, to its lowest level since mid-2022.4

In 2024’s first quarter, personal consumption expenditures represented nearly 68% of the nation’s GDP.2 Much of that spending requires financing, some for bigger ticket items like homes, automobiles and higher education and some in the form of credit card debt for day-to-day purchases.

An increasing proportion of spending is the result of rising consumer debt. In the fourth quarter of 2023, total household debt in the U.S. reached a record high $17.5 trillion. This represents a 3.6% increase over the amount of debt held one year prior but may not yet be a major concern.5 “Debt level growth in recent months appears to be in line with wage growth, so at this point, it doesn’t seem to be raising a red flag,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

Chart depicts annual percentage change in total household debt 2013 - 2023.
Source: Federal Reserve Bank of New York, Center for Microeconomic Data, “Household Debt and Credit Report, 3rd Quarter 2023.” Data through Dec. 31, 2023.

Household savings rates have fallen off from their unusual COVID-19 pandemic-era peaks in early 2020, when they reached a level of close to one-third of disposable personal income. As of March 2024, the personal saving rate was 3.6%.6 “Something closer to 6% is considered typical,” says Haworth. “With savings mostly depleted, the strong labor market, featuring low unemployment and solid wage growth, is helping consumers maintain higher spending levels despite reduced savings,” says Haworth.

Can consumers remain in a position to fuel ongoing economic growth in the face of persistent inflation and higher interest rates? What are the potential economic and capital market implications?

 

Putting “record household debt” into perspective

The data show that consumers are borrowing at a more rapid pace. This trend emerged in late 2022, according to Haworth. “We saw a meaningful rise in the amount of consumer borrowing, mostly in the form of unsecured revolving credit, like credit cards.” Total credit card debt in the U.S. topped $1 trillion for the first time ever in the second quarter of 2023 and surpassed that record again in the 3rd and 4th quarters. Credit card debt increased 14.1% for the one-year period ending December 31, 2023.5

Chart depicts changing household debt from Q4 2022 to Q4 2023 across a range of categories including student loans, auto loans, home mortgages, credit cards and other categories.
Source: Federal Reserve Bank of New York, Center for Microeconomic Data, “Household Debt and Credit Report, 4th Quarter 2023.” As of Dec. 31. 2023. *Includes retail cards and other consumer loans.

“Debt level growth in recent months appears to be in line with wage growth, so at this point, it doesn’t seem to be raising a red flag,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

While borrowing levels are on the rise, Haworth cautions that some perspective is helpful. “Consumers today aren’t on a borrowing spree, but borrowing up to a point where it makes sense for them.” As shown in the chart below, through 2023 (for which the most recent data is available), household debt service payments represented, on average, less than 10% of disposable personal income. While higher than the recent low point of 8.3% in early 2021, it is far below recent peak levels in 2007 and 2008, when debt amounted to more than 13% of disposable income.7

Chart depicts annual household debt service payments as a percentage of disposable income from 2000 to September 30, 2023.
Source: Board of Governors of the Federal Reserve System (US). As of December 31, 2023.

“Following the global financial crisis (from 2007-2009), it appears consumer attitudes and behaviors toward indebtedness have changed,” says Haworth. “Unlike the previous era, consumers today are not so overextended that they will have a hard time paying off debts.”

 

Manageable consumer debt levels

“Non-mortgage debt is back to pre-pandemic levels relative to income, but not yet anything of concern,” says Matt Schoeppner, senior economist at U.S. Bank. “Mortgage debt is still reasonable by recent standards, even with the spike in mortgage rates.”

The jobs market heavily influences consumer spending habits. “For now, the labor market remains robust,” says Haworth. A key number to watch is the report on initial weekly jobless claims. The measure rose to 265,000 in June 2023, but dropped since then, most recently to 208,000 new jobless claims for the week ending April 27, 2024.8 “It will become more concerning if initial weekly jobless claims consistently rise above 300,000,” says Haworth.

Does consumers’ willingness to continue spending complicate the Federal Reserve’s effort to lower inflation? “The Fed is trying to find a level of borrowing costs that is sufficiently restrictive to slow things down enough to bring inflation back down to its target level of approximately 2%,” says Schoeppner.

 

Keeping an eye on debt

What is the risk of consumers spending beyond their means in the coming months? Haworth is watching two key indicators:

  1. The volume of revolving credit relative to disposable personal income. This metric remains relatively low based on the most recent data. “If it starts to tick up meaningfully, it could trigger more concerns about the potential for consumers to pull back on spending,” says Haworth. That could contribute to recession fears. However, Haworth believes this risk is receding based on recent data.
  2. The state of the job market. “If there are signs of weakening employment measures, that could indicate consumers will be forced to rein in spending or carry considerably more debt to maintain current spending levels,” says Haworth. “To date, we’re not seeing recessionary signals like a ramping up of layoffs or a contraction in payroll employment figures.”

It’s important to consider the current economic outlook as you evaluate your own portfolio of investments. Talk to your wealth planning professional to assess how your portfolio can be best positioned, keeping in mind current market dynamics and your long-term financial goals.

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Disclosures

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  1. Source: U.S. Census Bureau, “Advance Monthly Sales for Retail and Food Services, March 2024,” Apr. 15, 2024.

  2. Source: U.S. Bureau of Economic Analysis.

  3. University of Michigan, “Surveys of Consumers, Preliminary Results for March 2024,” Apr. 5, 2024.

  4. The Conference Board, “U.S. Consumer Confidence Retreats in April,” April 30, 2024.

  5. Board of Governors of the Federal Reserve System, “Federal Reserve issues FOMC statement,” June 12, 2024.

  6. Source: U.S. Bureau of Economic Analysis, Personal Saving Rate, Seasonally Adjusted Annual Rate.

  7. Source: Board of Governors of the Federal Reserve System.

  8. U.S. Department of Labor, Employment and Training Administration.

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