Will the consumer remain resilient?

Consumer spending has remained resilient this year, despite some cooling labor market conditions and subdued measures of the overall consumer mood that are in line with prior recessions. The resiliency in household spending this year has provided a critical underpinning to continued growth, despite the Fed’s aggressive tightening. The fact that consumption growth has been sustained even as inflation recedes toward the Fed’s 2% target has renewed hopes that a soft landing could still be in the cards.

One factor has been the sizable buildup of cash on consumer balance sheets coming out of the pandemic. Today, cash balances remain quite elevated, providing a considerable cushion that has helped to fuel real spending growth even accounting for rising prices. A second major factor has been a surge in consumer credit. As shown in the chart above, revolving consumer credit outstanding (predominantly credit cards and home equity lines) has risen by about 15% over the past year. For those who may have already depleted their savings, credit has been an available lifeline to maintain spending. How long can these provide fuel to support spending? Neither represents an endless reservoir of liquidity, but for now, both still appear intact. However, rising interest rates are a growing headwind and a growing number of households are depleting their savings.

Ultimately, the jobs market may be the lynchpin. Despite the Fed’s tightening, job creation has remained solid and wages have risen at a pace well ahead of the more moderate gains in the last cycle. That persistent strength was a key consideration in the Fed’s recent decision to lift their year-end policy rate forecast by a half percent.

The bottom line? A soft landing may still be possible but would require consumer spending to push through the headwind of higher interest rates and a slowing jobs market.