Consumer Weakness Signals a Recession

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Consumers are being squeezed by negative real wage growth and inflation at 40-year highs. As a result, consumer sentiment is declining, and personal consumption habits are changing as people struggle to make ends meet.

With GDP growth running at -1.5% in the first quarter, a second consecutive quarter of negative growth will signify a recession. Personal consumption accounts for two-thirds of economic activity. As such, we must ask, will the plight of consumers drag GDP lower in the second quarter, resulting in a recession?

To help answer the critical question, let's consider the state of the consumer and their means to consume.

Personal consumption

Per the BEA, Personal Consumption Expenditures is "the value of the goods and services purchased by, or on the behalf of, U.S. residents."

The graph below shows that over the last 60 years, PCE has slowly risen from about 60% of GDP to nearly 70%. Its contribution to GDP fluctuates very little around that trend line.