Unhappy American Consumers Will Welcome a Slower Economy

The unhappiness of American consumers despite rapid job and economic growth in the past few years is a hotly debated topic. Is it inflation? High borrowing costs for homes and automobiles? Crowded airports and packed airplanes?

For better or worse, unmistakable signs of an economic slowdown will now give us the opportunity to test how consumers feel in a different environment. For the time being, there are reasons to believe consumers will welcome a slower-growth environment and some of the benefits that come with it. In Goldilocks parlance, perhaps the economy in 2022 and most of 2023 was too hot and 2024 will be “just right.”

The slowdown is most prominent at the level of gross domestic product: Trackers such as the Federal Reserve Bank of Atlanta’s have real GDP expanding at about a 2% annualized pace in the fourth quarter, slowing from 5.2% in the previous three months. Retail sales in October were sluggish and homebuilder confidence slumped in response to mortgage rates briefly hitting 8%. It’s reasonable to argue that the economy remains resilient, but it’s getting harder to find signs of overheating.

The flip side of that story has been cooler inflation that’s showing up in a tangible way for consumers. Gasoline prices fell every day for two consecutive months through Tuesday. New and used vehicle prices have declined for five consecutive months. Thanksgiving dinner was cheaper this year than in 2022.

There’s finally reason to believe that interest rates too have peaked, and consumers should be looking at cheaper borrowing costs in the future. Markets are pricing a roughly 40% chance of an interest rate cut from the Fed by March and expect the policy benchmark to be about a percentage point lower by year end. That’s helped drive 10-year Treasury yields down by more than 70 basis points since peaking near 5% in October; with the 30-year mortgage rate seeing a similar decline to 7.30% on Tuesday, the lowest level in more than two months.