What Is It About the US Consumer?

Resilient consumer spending has been a pillar of the US economy. While activity may soften, we think the consumer will help the coming slowdown stay mild.

Household expenditures account for more than two-thirds of US gross domestic product, making consumers the backbone of the US economy. It’s not surprising, then, that the household sector has kept the economy afloat in 2023—even on turbulent economic seas. Whether it was war in Ukraine, high inflation, interest-rate hikes or banking turmoil, nothing has managed to upend the economic ship—mainly because households have kept spending.

How have they managed to power through, and should we expect them to continue?

Insulated from the Worst of the Downturn So Far

Until now, strong household finances emerging from the pandemic combined with a strong labor market in the ensuing expansion have insulated households from the worst of the economic downturn.

During the depths of the COVID-19 pandemic, a mix of government stimulus and forced savings pushed the value of household liquid assets (checking accounts and time deposits, primarily) well above its long-term (Display). Strong capital-market performance and rising home prices bolstered consumers’ balance sheets, too. The net result: a sizable financial cushion to tap into as the US emerged from the pandemic.

Sizable Post-Pandemic Financial Cushion for Households

The robust US labor market has also played a key role, confounding all expectations (including ours!) that it would weaken as interest-rate hikes started to bite. Instead, US companies continued bringing in workers, to the tune of a net average of more than 200,000 every month. Wages continued climbing, easily outpacing the historical norm. As a result, even after adjusting for high inflation rates, the overall growth in the purchasing power of household income has remained relatively normal in the past couple of years (Display).

Real Consumer Purchasing Power Has Grown Despite High Inflation