When you want to know where the ship is headed, a good bet is to go directly to the person at the wheel. For the US economy, that would be the consumer, as every productive economic effort ultimately flows toward contributing to that person’s comfort, health, and happiness.
The Federal Reserve’s frequent and weighty interest rate hikes – continuing even after disinflation became a clear trend in the second half of 2022 – pulled in the industrial sector recession we had previously anticipated for the mid-2020s. We now project that the US Industrial Production 12-month moving average (12MMA) will decline from the second half of 2023 through 2024. As noted by ITR VP of Economics Jackie Greene in a recent post, the contraction will be mild by historical standards, thanks to ongoing onshoring efforts, continued foreign direct investment into the US, and solid consumer and business balance sheets in general.
The consumer holds the power to sway results to one side or the other of our forecast. We have always monitored the consumer’s financial health with a hawk-like focus and will only intensify that moving forward. For an accurate assessment of consumer health, we make our inquiry from multiple angles:
US Total Retail Sales are our benchmark indicator of consumer activity. Some media outlets reported poor November results, but our analysis puts the October-to-November change right at the historical median for those months. The result is in line with our expectation for ongoing slowing growth in 2023, which will give way to general flatness – with a brief dip into Phase D, Recession – in 2024. Our expectation for softening but not cratering consumer activity is supported by other data.
Consumers are relatively unencumbered at this time. The US Credit Card Delinquency Rate was at 2.07% for the third quarter of 2022 (the latest available data), coming in below the pre-COVID 10-year average of 2.80%. Mortgage delinquencies of 90 days or greater were at 0.37%, a record low for the nearly 24 years of recorded data. Third-quarter auto loan delinquencies came in 10 basis points below the 10-year average.
These numbers do not guarantee a bill of perfect consumer health. They lag the present, for one thing, offering more of a “quarter-ago” view rather than a real-time assessment. However, the latest values do indicate a healthy baseline with some wiggle room, and, as ITR CEO and Chief Economist Brian Beaulieu noted in his and ITR President Alan Beaulieu’s Dec. 15 webinar, “These numbers don’t jump – they creep.”
Income and savings
These indicators are throwing somewhat murky signals. US Real Personal Income Excluding Transfer Payments, a deflated measure of income that takes government stimulus payments out of the picture, have registered an essentially flat 12-month moving average since early 2022. Meanwhile, our in-house analysis suggests that personal savings levels, adjusted for inflation, have been declining for most of this year.
The consumer has a real strength here. The labor market is tight enough that, barring some COVID-esque catastrophe, it can’t just flip on a dime. We expect that the upcoming macroeconomic downturn will ease labor difficulties to an extent for employers without triggering an economy-wide tsunami of layoffs. Keep in mind that certain companies and industries will have more layoffs than others. Media reporting will focus (and has focused) on these darker spots rather than overall relative stability, such that it is. Per the most recent seasonally adjusted Bureau of Labor Statistics data, there were 1.7 job openings for every unemployed person in October. At the onset of the Great Recession, that ratio was inverted, with 1.7 people per opening.
In our flagship Trends Report™ publication and elsewhere, we have been referring to the consumer as “bending but not breaking” for the better part of a year. That assessment still holds. The consumer is strong, albeit not invincible, and in significantly better shape – particularly when it comes to liabilities and opportunity – than during the run-up to the Great Recession. For more information on consumer trends, consider a trial subscription to the Trends Report, which includes forecasts for US Total Retail Sales, US Private Sector Employment, and much more.