Two the Point — Consumer Spending: Confidence Soars, But Will Wallets Follow Suit?

The U.S. economy relies heavily on consumer spending, which makes up about 70% of the nation’s GDP. Since 2020, consumers have faced a unique and challenging environment due to the pandemic’s economic shutdowns and subsequent efforts to boost spending through fiscal stimuli. These events caused a surge in inflation last year, attracting close attention from experts looking out for potential influences on consumer behavior.

The two most important factors affecting consumer spending moving forward are worth considering. First, the significant decrease in oil prices over the past 12 months has positively impacted consumer spending by reducing fuel costs and indirectly benefiting other expenses. Second, the restart of student loan payments later this year might create a minor hurdle for consumers. As these effects are intricate, assessing their net impact on consumer behavior remains challenging, but we will carefully account for these dynamics while shaping our outlook for the rest of 2023 and 2024.

Amidst these considerations, the latest Consumer Confidence Index has reached its highest level since July 2021. It stands at 117.0, rising from 110.1 in July and surpassing its recent cycle low from last summer by 21.7 points. This increase is mainly driven by the expectations component, which rose 8.3 points to 88.3, and the present situation index, which went up 4.7 points. If this elevated consumer confidence remains throughout the third quarter, historical trends suggest a likely increase in consumer spending during that period. There are doubts about whether this increased confidence will directly translate into actual spending, given the recent slowdown in real consumer spending and the stagnation in discretionary spending indicators. Consequently, the interplay between various factors and consumer spending will be closely monitored as we progress through this year and next.