Two the Point — The U.S. Consumer – Pillar of Strength or Emerging Liability?

Market Insights in Two Minutes – Personal consumption expenditures account for a staggering 68% of U.S. Gross Domestic Product. Since 2020, the U.S. consumer has been a beacon of hope for an economy that again appears to be on shaky ground. Lately, however, we have noticed some indications of emerging weakness in consumer demand.

Even with a strong labor market, consumer finances are being stretched by a long list of rising costs. Although we expect that we’ve already seen the peak in inflation, prices are unlikely to fall in any material way during the rest of 2022. As highlighted by Strategas Research Partners, “Combining the year-over-year percentage change in food at home, mortgage rates, and gas prices shows that consumers’ wallets have been the most stressed since the early 1980s”. Only two other periods since the early 1970s have shown higher readings…both resulting in a recession.

As further evidence, consumer credit has now passed peak levels from February 2020. Although credit can clearly expand from here, this may be a sign of consumer weakness – needing to rely on credit to fund current levels of consumption. Our base case economic forecast is that we avoid a recession in 2022, however, a slowing consumer will likely have negative implications not only for economic growth but also for corporate earnings which have yet to be revised materially lower.

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