The U.S. Consumer Is Doing Pretty Well, However …

Marc Zabicki:

The U.S. consumer has been on a post-covid spending spree that has lasted approximately three years, and with the jobs market humming along, there are few signs of any near-term slowdown. Add to that a significant wealth effect from high equity in housing prices, and consumers should be feeling pretty good about opening their wallets for this foreseeable future. However, in this latest edition of LPL Street View, we will take a look at a couple data series that catch our attention when it comes to assessing the future strength of the U.S. consumer and therefore evaluating approximately 68% of the U.S. economy. Things indeed look rosy today, but there are some imbalances building that give us some level of concern. With a low U.S. unemployment rate, jobless claims near multi-year lows and significant wealth effects from a strong equity and residential real estate market. The U.S. consumer has shown less interest in piling up much savings in recent years. Following a covid-induced spike in the savings rate, consumers have pulled money from their piggy banks at a rate that resembles the housing market bubble period in the mid-2000s. The mid-2000s is probably not a point in our history that we would suggest U.S. consumers emulate. This leaves us concerned about potential excesses in the system. Why? Low savings rate leaves little in the reserve for the consumer. This suggests that any emerging weakness in the jobs market could have a more negative effect on consumer spending than some forecasters may be expecting. We all know the U.S. consumer likes to spend money. This chart is certainly evidence of that as long-term trends have followed the long-term growth of the U.S. economy and consumer incomes. Lately, however, spending trends have deviated materially from the long-term run rate. This sharp rise is due in part to the lift in consumer prices, but the recent trend does provide some illustration that the consumer may be overdoing it just a little bit.

Marc Zabicki:

The risk here is that the sharp post-covid rise in spending could be followed by a material correction that would allow spending trends to revert toward longer-term run rates. We believe the longer this deviation from trend continues, the more worried we get that U.S. consumers may be getting too far over their skis. What's the message here? While the U.S. consumer is in good shape at the moment, we believe current spending rates are perhaps unsustainable and prone to some reversion to the mean. In addition, low savings rates leave the US economy more distinctly susceptible to any negative turn in the jobs market. The bottom line here is that we believe consumer spending trends are treading on relatively thin ice. Today, current conditions are leaving consumers and investors feeling decidedly sanguine. It's our job, however, to analyze potential instability in the system that may yet be uncovered and build those probabilities into our forecast. Given the emergence of some irrational exuberance in consumer spending habits, there is a risk that this market is left unprepared for the eventual return to spending normalcy. Thanks for listening, and as always, allocate wisely.