Fate of the Economy? It's in the Hands (Wallets) of the Consumer

DEWITT, Mich. - May 23, 2023 - PRLog -- Key takeaways:

• The path ahead for the economy is in the hands of the consumer, given 70% of U.S. GDP comes from personal consumption. Consumers have been quite resilient of late, but data confirm that consumers are beginning to get a bit winded. We think a gradual slowdown in consumer spending is likely to transpire this year.
• Unemployment is at a half-century low, while wage growth remains healthy, reflecting a strong labor market that should provide support to consumer spending as the economy slows. However, signs of softening employment conditions are beginning to surface.

Debt-ceiling drama, turmoil in the banking sector, hand-wringing over the Fed's next move -- all of these have been top of mind lately. But it's the economy that blazes the path upon which markets travel, and when it comes to the economy, the buck stops (and starts) with the consumer.

With the growing prospects of an emerging slowdown, the fate of the economy will ultimately rest on the shoulders of the consumer. Those shoulders are quite broad, though not unrelenting, supporting our view that a recession this year is quite feasible, but would be mild. With a fresh batch of spending data released last week, the market spotlight shifted squarely to the state of the consumer. Here are our three key takeaways:

1. Consumers are showing some initial signs of fatigue.

• Consumer spending has been particularly strong of late, including a strong start to 2023, with consumption growing by 3.7% in the first quarter, the best pace in two years.¹

2. Cracks in the labor market are emerging but will remain a source of energy for consumers.

• A historically tight labor market has been a hallmark of the post-pandemic economy. This has been a two-edged sword, as it's supported elevated consumer demand, but also prevented inflation from receding more quickly. We think both of those edges will dull a bit as we progress, with signs of modest softening in employment conditions beginning to emerge.

3. An atypical recession may be in the offing.

• Talk of a looming recession may not feel overly inspiring for investors, but consumers will dictate the terms. Given the health of the labor market and consumer finances, we think household spending will hold up significantly better than prior recessions, giving this slowdown a different (more mild) complexion.

Sources: 1. Bloomberg.