US consumer spending is expected to slow further, but it will not fall off a cliff

A version of this story first appeared in the CNN Business Pre-Bell newscast. Not a subscriber? You can subscribe here. You can listen to the audio version of the newsletter by clicking on the same link.

Washington, DC
CNN
—

After a stellar summer characterized by strong consumer spending and resilient financial markets, the US economy is widely expected to slow in the coming months as the Federal Reserve continues its historic battle with inflation.

Investors and economists are optimistic that consumer spending, the main driver of the US economy, will not deteriorate much, which should help stocks avoid a broad sell-off this year. However, investors shouldn’t expect stellar returns anytime soon either.

“We expect the labor market to soften somewhat over the rest of the year, and we’ve seen credit card balances and delinquencies increase, so that should flow into lower consumer spending,” said Matthew Palazzolo, chief investment strategist at Bernstein Private. Wealth Management told CNN. But we do not expect a major recession. We certainly expect a slowdown in the economy.

That means “markets are moving sideways through the rest of the year until we get a better view of what 2024 will look like,” Palazzolo said.

In general, the stock market has rallied this year, mostly due to chipmaker Nvidia and hype around artificial intelligence boosting technology stocks, although stocks are Dropped in August. (This is usually a bad month for stocks, as investors prepare for the holiday.)

One looming economic headwind is the resumption of student loan payments in October, which could mean Americans cut back on their spending.

It’s still not clear how much impact student loan repayments will ultimately have on spending. The Biden administration has introduced an income-based payment plan, hoping to cushion the blow. According to Wells Fargo, the average monthly payment among the 44 million Americans who take out student loans is between $210 and $314.

Another major uncertainty on the minds of both Fed officials and investors is that the economy is still competing with the central bank’s most aggressive inflation-busting campaign in decades. Research shows that it may take at least a year for the effects of rate hikes to ripple through to the broader economy. The Fed started raising interest rates in March 2022. The last hike was last month.

In his highly anticipated speech at the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming, Fed Chair Jerome Powell said Friday that “there could be more significant drags in the pipeline” that the economy has not yet felt, and warned that It is not clear when these effects might take hold.

If the economy is performing moderately, that would be a good signal for the Fed. It has been trying to achieve exactly that, ie, to draw some steam out of the economy and thus reduce inflation.

What also weighs on investors and economists is the American consumer’s addiction to credit cards. Americans have accumulated steadily more debt this year as their savings accounts dwindle. Recent research by the Federal Reserve Bank of San Francisco predicts that the excess savings Americans have accumulated from pandemic-related stimulus payments and not spending during lockdowns will run out by the end of this quarter.

These factors could also lead to a slowdown in consumer spending in the crucial next few months, as students return to school and the holiday season approaches. Sinead Colton Grant, head of investor solutions at BNY Mellon, told CNN.

“We’re watching the consumer, because it’s a very big driver of the US economy, but we think these impacts are likely to be on the margins,” she said. “If the holiday spending period is less robust, that would be a potential warning sign about consumer strength.”

It has been nearly two decades since Germany relinquished its title of “sick man of Europe” with a series of labor-market reforms that heralded years of economic outperformance.

Unfortunately for Berlin, the phrase is making a comeback, says my colleague Anna Cuban.

Static inflation and three consecutive quarters of declining or stagnant output have put Europe’s largest economy in recession.

So much so, that the International Monetary Fund expects the country to be the only advanced economy to contract this year – projecting a contraction of 0.3%, compared to the average expansion. By 0.9% for the twenty countries, including Germany, that use the euro currency.

A prolonged recession would be a disappointing outcome for an economy that grew at about 2% annually in the decade after the 2008-2009 financial crisis, ran a budget surplus for most of that period and saw its exports boom.

Read more here.

A big week for the markets and the economy is just around the corner

TuesdayProfits from Best Buy and Big Lots. S&P Global will release the S&P CoreLogic Case-Shiller National Home Price Index for June. The US Department of Labor publishes July figures on job openings, resignations, hirings and layoffs. The Conference Board releases the Consumer Confidence Index for August.

Wednesday: The US Department of Commerce releases its second estimate of GDP in the second quarter. The National Association of Realtors announces home sales based on contract signings in the month of July. The China National Bureau of Statistics releases its August business surveys, which measure economic activity in China’s manufacturing sector.

ThursdayEarnings from Victoria’s Secret. The European Union’s statistics agency publishes inflation data for August. The US Department of Commerce publishes July data on household spending and income, the Fed’s preferred measure of inflation. The US Department of Labor announced the number of new applications for unemployment benefits for the week ending August 26.

Friday: The US Department of Labor releases August figures on the labor market, including monthly payroll gains, wage growth, and the unemployment rate. S&P Global and the Institute for Supply Management released their August Business Surveys, which measure economic activity in the US manufacturing sector.