U.S. Consumer Demand Deceleration Bodes Well for the 2024 Rate Outlook
September 25, 2023
Resilient U.S. household balance sheets and solid real income growth have supported consumer spending thus far in 2023. Real consumer spending grew at a robust pace through July (+3.0% Y-Y). Workers have continued to benefit from a tight job market, with the prime-age labor force participation rate at its highest level in two decades (83.5%) and the unemployment rate near historic lows at 3.8%. In addition, excess pandemic household savings and loose fiscal policy have been additional pillars of support for the U.S. economy. However, headwinds are appearing on the horizon as we look ahead to Q4 2023 and into 2024. These are primarily due to tighter credit conditions which have started impacting the cost and pace of credit growth. Long and variable lags in monetary policy transmission suggest that the cumulative impact of monetary tightening, now 18 months in, will intensify in the early part of 2024. The consequential impacts on the labor market and wage growth will be evident and positive for interest rates starting in 2024
The resilience of demand in the U.S. household sector is likely to start fading in Q4 2023. This will be led by real spending slowing to 1.4% (Y-Y) due to the restart of student federal loan payments, tightening financial conditions and job growth deceleration. In addition, households have depleted nearly all the excess savings accumulated from a combination of government handouts and restrained spending during the pandemic. Lower-income cohorts are increasingly coming under pressure under the higher cost of capital environment. The personal savings rate has declined to 3.5% in July, and we expect that it will rebound to 4% by end-2023 and over 5% by end-2024. Consumer confidence has recovered from its trough in 2022 H2 but remains low. The University of Michigan consumer sentiment survey fell to 67.7 from 69.5 a month ago with the report indicating that consumers continued to see high interest rates and elevated inflation as downside risks to growth and spending.
Consumer credit growth has slowed significantly (+4.9% Y-Y; +2.0% 3-month average annualized rate) from its peak level of 10% annualized growth in April 2022. Auto and credit card delinquencies are clearly trending higher, but not enough to set off alarms yet. While there has been a notable uptick in subprime auto loan delinquencies, credit card delinquency rates remain below their pre-pandemic levels, and household leverage and debt servicing costs remain low by historical standards. Mortgage delinquencies are only starting to rise and should prove to be the most resilient through this cycle due to tighter credit standards and refinancings prior to rate hikes.
In conclusion, we expect the softer consumer spending backdrop to keep inflation expectations in check as we head into 2024. As such, we believe the Fed’s interest rate hiking cycle is approaching its end soon, along with peaking real interest rates and nominal yields across the Treasury curve.
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