The Impact of Consumer Spending on the US Economy

The Importance of Consumer Spending

A recession is nearly impossible as long as consumer spending is growing. So far, American shoppers have continued to shell out cash for purchases, despite stubbornly high inflation and interest rates at 23-year highs. Wednesday’s report is expected to be positive, with economists predicting a strong holiday shopping season boosting consumer spending by 0.4% in December from the month prior.

However, new data from the New York Federal Reserve has soured the mood on Wall Street. The report showed that Americans have slowed some of their spending and expect to pull back further. The median increase in monthly household spending slowed to 5.01% on an annual basis in December 2023, down from 5.5% in August 2023 and 7.1% in December 2022. The outlook for consumer spending doesn’t look bright, with the median expected growth in monthly spending dropping to 3%. Survey respondents also said they expected to reduce their spending on essentials like groceries.

The confluence of problems, including global instability affecting shipping routes and increased shipping costs, could impact consumer spending. Container vessels are now avoiding both the Red Sea and the Suez Canal, causing delays and driving up transportation costs. The World Container Index has doubled since early December, and the increased shipping costs could get passed on to the consumer, just as inflation rates have started to fall and the Federal Reserve appears ready to lower interest rates.

The Resilience of the Consumer

Despite the challenges, Bank of America CEO Brian Moynihan believes the consumer will remain resilient. He highlighted that people are employed, unemployment is low, and they are getting paid more. Inflation remains tough, but the stock market being up and accumulated wealth are factors that contribute to consumers making more money. Disney CEO Bob Iger's compensation of $31.6 million in 2023, despite the company's challenges, further reflects the potential resilience of consumers.

China's Demographic Challenge and Economic Impact

China's demographic challenge, marked by a record low birth rate and a shrinking population, has significant implications on the world's second-largest economy. The deepening demographic challenge comes at a time when China's economic growth is sputtering, with a growth rate of 5.2% in 2023, one of the country's worst economic performances in over three decades.