Fisher Investments Reviews the Economic Health of the US Consumer

Undeniably, some households have been stretched by cost of living increases in recent years. Inflation’s bite is real and we don’t diminish the impact it has on people. But in our view, while consumer spending data has pockets of weakness, households are in better shape than the doom and gloom would suggest. In this article, we’ll discuss why consumer spending—despite its large share of the economy—isn’t as important to monitor as many believe and how business investment is often the better indicator of recession.

A Closer Look at Consumer Spending

Before we look at the economic health of the consumer, Fisher Investments believes it’s important to understand why so many market prognosticators, and investors alike, are razor-focused on data related to the consumer.

Like many developing economies today, the US, Europe and others slowly transformed from manufacturing-intensive to service-oriented in the post-World War II era. Consumption—represented by Personal Consumption Expenditures (PCE)—now makes up the majority of the economy (Exhibit 1), so it’s understandable why market-watchers may be sensitive to any indication of weakness. However, over the last 20 years, consumption has been a relativley stable portion of the economy, rarely moving more than a couple of percentage points depending on other factors of gross domestic product (GDP). In our view, this is one indication the consumer is far more resilient than people perceive. Which products and services are being bought may ebb and flow over time, but consumers don’t often pull back on spending altogether very often.

Exhibit 1: Personal Consumption Expenditures as a Percentage of US GDP

US Households Are Surprisingly Healthy

Despite the relative stability of consumer spending, some believe this time is different. They argue household savings are tapped, depleted by higher prices and rising interest rates, causing consumers to over-rely on credit—evidenced by record high credit card balances and rising delinquency rates. Data supports this argument to a degree, but it’s not the whole story.

Yes, delinquencies in some categories—such as credit card, mortgage and auto—are up. But they are within normal levels from recent decades and remain well below 2008's historic highs.^[i] Additionally, it’s true there has been a notable rise in the absolute level of credit card balances. Some of that is likely related to inflation, but the important thing to monitor is whether the consumer is broadly able to keep up with interest payments.

As Exhibit 2 shows, current household debt as a percentage of personal income is a shade under 10%. That’s well in line with pre-COVID trends and far below what it was in the 1990s—a great period for stocks. Additionally, the average consumer has about as much debt as they do cash assets—meaning many possess the ability to pay off their debt if they wanted to. Whatever economic turbulence may lie ahead, households appear able to weather it.

Exhibit 2: US Households Are Healthy

Business Investment—The Real Swing Factor

So if it’s not consumer spending that has historically indicated the future health of the American economy, what has? In our view, business investment—with its much wider swings compared to consumer spending—has often driven recessions, recoveries and reaccelerations.

Exhibit 3 illustrates this well. In every US recession dating back to 1948, the decline in business investment has far outweighed that of consumer spending. Notably, corporate spending declined even when consumption didn’t in 1948, 1953, 1969, 1981 and 2001.

Exhibit 3: Business Investment’s Wild Fluctuations

Source: US BEA, as of 4/4/2024. Cumulative change in consumer spending and nonresidential fixed investment during recession, 1948 – 2009. COVID-era recession omitted because lockdowns distorted spending.

Despite consumer spending concerns, we believe business investment—and US economic growth—likely continues as businesses shift towards a more offensive mindset, consumer spending remains resilient and inflation keeps normalizing.

Following widespread recession fears in 2022, corporations retrenched via layoffs, inventory drawdowns and slashed or postponed investments. In that respect, we believe we experienced a “recession reset” without the broader pain of recession itself. Now, the typical recovery’s fruit is forming and business investment should contribute to a strengthening economy.

While consumer health is understandably fretted, it isn’t the needle mover many expect. Personal and anecdotal experience may suggest the state of the consumer is worse than official data illustrates—and signs of consumer strain certainly show. But, in our view, that isn’t what matters to cold-hearted markets, which move on broader trends and appear to be in fine shape overall. Additionally, business investment appears unlikely to unwind anytime soon, suggesting budding recession concerns are a another brick in the wall of worry stocks climb.

Want to Dig Deeper?

In this article we discussed why we believe consumer health concerns are likely overblown. For more analysis on consumer spending and business investments’ role as a forward-looking indicator, you can read Fisher Investments’ MarketMinder article, “Looking Beyond ‘the Consumer’.”