In aggregate, the U.S. consumer and American households are in strong overall shape. According to June 2024 data released by the Federal Reserve, U.S. household net worth rose to $160.8 trillion, marking a 3.3% increase from Q1 and reaching a new all-time high. The increase was largely attributed to a rising stock market, higher housing prices, and interest income from higher rates.1
Consumer spending, in aggregate, has also held up well over the past few years, despite many economists projecting a slowdown once pandemic savings dwindled. As seen in the chart below, retail sales (blue line) and consumer spending adjusted for inflation (red line) have steadily grown year-over-year. In July, retail sales rose by a seasonally adjusted 1% compared to June, a pace notably stronger than economists were expecting.
Consumers, in Aggregate, Continue to Spend and Drive Economic Growth
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But, strong aggregate spending data does not mean all U.S. consumers are in good shape. In fact, many aren’t.
This divergence among consumers is evident in earnings reports. As many readers know, earnings and estimates play a pivotal role in Zacks Investment Management’s approach to investment decision-making. In our continuous analysis, we’ve noticed something over the past year or so in earnings calls and earnings reports. An increasing number of consumer staples companies, food companies, household goods companies, etc. are using the term “bifurcation” to describe the spending gap between higher-income consumers and lower-income consumers.
On the higher end, consumers are benefiting from high and rising asset prices (houses, stocks, etc.), increasing dividend income, and higher yields on bonds and money market funds. According to June 2024 U.S. Commerce Department data, Americans earn investment income at a seasonally adjusted rate of $3.7 trillion annually, marking a $770 billion increase from January 2020. Stocks have also risen substantially during this period, despite the 2022 bear market.
On the lower end, consumers have run out of pandemic-era savings and are disproportionately feeling the effects of higher inflation, particularly in key areas like food, housing, and insurance prices. Rising interest rates also tend to hurt lower-income households more than they help, given the impact of higher borrowing costs. Many lower-income households must borrow even as rates go up, which has led delinquency rates higher in recent quarters. The St. Louis Federal Reserve estimates that Americans were on pace for $531 billion in personal interest expenses in 2024, up 77% from two years earlier.
For now, I do not think we need to raise any alarm bells concerning rising debt loads and delinquencies. According to the New York Fed, 3.2% of outstanding debt is in some stage of delinquency, and delinquency rates across different types of debt remain relatively low, even though they’ve been rising slightly.
It is also important to remember, as I’ve noted before, that household debt service payments as a percentage of disposable income remain below 10%. As seen on the chart below, this suggests households are better off than they’ve been in previous decades, even as debt loads and delinquencies rise (from low levels).
Household Debt Service Payments as a % of Disposable Income
Source: Federal Reserve Bank of St. Louis5
Bottom Line for Investors
The picture that emerges from this consumer analysis is a two-track economy, where robust spending by one segment of consumers is counterbalancing a spending slowdown elsewhere. For investors, this setup makes two questions critical when looking forward: 1) Will the ‘wealth effect’ of higher asset prices and interest income continue to drive spending higher in aggregate, and 2) Will the jobs market remain tight enough to continue to push real wages higher?
For the balance of 2024, I think the answer to both questions is yes. By some estimates, the wealth effect could drive a 0.3% increase in consumption over the next year, particularly as inflation continues to trend lower and as rates remain relatively high. And for now, wage gains continue to outpace inflation, which is keeping lower-income consumers spending. I expect to see real incomes continue rising for the balance of the year across the income spectrum, as inflation moderates further.
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1 Wall Street Journal. July 30, 2024. https://www.wsj.com/economy/consumers/inflation-interest-rates-wealth-loans-51d4276e?mod=personal-finance_lead_pos3
2 Fred Economic Data. 2024. https://www.wsj.com/economy/consumers/inflation-interest-rates-wealth-loans-51d4276e?mod=personal-finance_lead_pos3
3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
4 The Federal Bank of New York. August 6, 2024. https://www.newyorkfed.org/newsevents/news/research/2024/20240806
5 Fred Economic Data. July 26, 2024. https://fred.stlouisfed.org/series/TDSP
6 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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