The United States is a consumer-driven economy. But over the past half century, the U.S. consumer has been weakened within the face of social and economic pressures.
In recent years, the Federal Reserve’s loose monetary policy and monetary stimulus have boosted consumption, but with the resurgence of inflation after the pandemic, these measures have lost their impact and consumer spending has resumed its long-term trend of declining growth. This will likely result in a recession.
What is the choice? A US version of Japanification, during which the Fed, the federal government, or a mixture thereof artificially keeps the US consumer afloat.
A consumer-driven economy
How consumer-oriented is the US economy? Personal consumption expenditure (PCE) accounts for two-thirds of total GDP, while gross exports only account for about 10%. The U.S. economy is internally focused and doesn’t rely heavily on external revenue. Therefore, the central role of the buyer has turn out to be increasingly central during the last 50 years.
As a share of U.S. GDP, PCE has increased from 59% in 1968 to 68% in 2022, while net exports have declined and entered a deficit over the identical period, from 0.1% in 1968 to -3.3% in 2022. This export deficit reflects consumption, suggesting that this too is now driven by the buyer.
PCE as a percentage of US GDP
Sources: Map data from US Census Bureau, BEA, BLS, FRED, BIS
With a weakening consumer
But the U.S. consumer faces persistent and increasing headwinds. While the PCE share of GDP has increased, each nominal and real PCE growth have slowed over the past half century. Nominal PCE growth fell from 9.9% in 1968 to three.5% in 2019 and real PCE growth fell from 5.7% in 1968 to 2.7% in 2022. This suggests that the economic influence of the US consumer is decreasing.
Net PCE (left axis) vs. US net exports (right axis), each in US billions
Dovish monetary policy and government stimulus measures have boosted PCE growth since 2000. These measures were accelerated within the wake of the COVID-19 pandemic and led to a pointy increase in nominal PCE growth and an increase in inflation. But this policy can’t be sustained within the face of upper rates of interest.
Nominal PCE YoY vs. Real PCE YoY
What is plaguing the US consumer?
1. Slower income growth
PCE growth, particularly after 1968, was accompanied by rising household debt, and the US consumer is increasingly depending on debt. Household debt now accounts for a bigger portion of nominal PCE, rising from 73% in 1976 to a peak of 141.5% throughout the Great Recession in 2008. In 2022, it stood at 109%. The share of debt in PCE is growing, and subsequently the US consumer is more indebted and has less spending capability.
Household Debt vs. Nominal PCE YoY
2. Weakness of other economic aspects
The PCE share of GDP has increased, even though it has grown more slowly. This signifies that the pace of growth of other GDP components – for instance net exports and capital expenditure (CapEx) – has declined even faster. Additionally, U.S. wages haven’t kept pace as PCE accounts for an ever-larger share of GDP.
PCE/GDP (left axis) vs. worker compensation year-over-year (right axis)
3. Rising inequality
In a consumption-driven economy, increasing inequality reduces the resources available to an ever larger portion of the population and consequently reduces overall consumption. The U.S. Census Bureau estimates that inequality within the U.S. has increased over the past 50-plus years, with the country’s GINI inequality index rising from 0.394 in 1970 to 0.488 in 2022. The income of the highest 10% of US households jumped from 213%. as much as 290% of median household income over the identical period. As wealth becomes concentrated in an ever smaller cohort, the purchasing power of the bulk decreases.
Median household income growth by quintile
4. Demographic challenges
U.S. population growth has been on a reasonably consistent downward trend because the Nineteen Sixties. This signifies that the population is aging and the proportion of young people driving consumption shall be lower. Both nominal and real PCE growth have seen lower population growth over the past 50 years.
Nominal YoY PCE Growth (Left Axis) vs. Nominal YoY Population Growth (Right Axis) (%)
So what are the implications?
Taken together, these aspects point to 4 essential developments:
1. Slowing real PCE growth
Real PCE growth has fallen back to pre-pandemic levels following the COVID-19 collapse. Of course, healthcare, online services, travel and automotive sales, amongst others, are bucking the trend, but they’re the exceptions.
Real PCE YoY Growth Percentage (%)
2. A shifting debt burden
After the worldwide financial crisis (GFC) and again throughout the pandemic, the federal government increased its debt burden to support struggling consumers and keep the economy afloat. Thus, the burden of debt that fueled economic growth shifted from the buyer sector to the general public sector, and PCE growth followed total debt more closely than household debt.
Nominal PCE YoY vs. Total Debt YoY
But this phase of increased government spending is coming to an end resulting from higher rates of interest. Currently, debt growth across all non-financial sectors – government, households and corporates – is declining, as is PCE growth. Meanwhile, consumer loan default rates have increased and are back to pre-COVID-19 levels. The COVID outbreak in government stimulus is over and consumers are once more swimming against the tide.
Consumer Loan Default Rates (%)
3. Falling inflation
As consumption growth slows, demand-side inflation also slows. Supply-side aspects were accountable for the recent rise in inflation, which peaked in 2022. As these aspects have disappeared and consumer demand has weakened, inflation has also weakened.
YoY Inflation vs Real YoY PCE Growth by Quarter (%)
Real PCE YoY (left axis) vs Inflation YoY (right axis)
At a bigger level, the connection between CPI and real PCE has modified significantly since 1980. Over the past 30 years, CPI and PCE growth have tended to maneuver in opposite directions. Consumer demand appeared to reply to price changes. However, in the next years, the buyer price index and real PCE growth began to maneuver in parallel. The CPI was not a driver of consumer spending, but somewhat was determined by it. Even when inflation fell, consumers stopped consuming.
Real year-on-year PCE growth in comparison with year-on-year NFP growth per quarter
4. Declining job growth
Consumer spending drives job creation in a consumption-driven economy. After fluctuations throughout the pandemic, the speed of job creation has fallen according to nominal and real PCE growth.
Real PCE growth year-over-year in comparison with Non-Farm Payroll (NFP) growth year-over-year
And what in regards to the long-term prospects?
What does this all mean for the long run of the U.S. consumer and the U.S. economy? There are three implications:
- Consumer influence will proceed to say no. Why? Because it shouldn’t be expected that the headwind will subside. And if consumer spending slows, GDP growth will likely stall as well, potentially triggering a recession.
- The last 15 years have shown that a rise in PCE growth requires additional and ongoing fiscal or monetary support for the buyer. This represents our US Japanization scenario, during which the financial and monetary authorities tackle the debt obligatory to maintain the economy running.
- This slowing consumer trend spans the previous couple of a long time and countless technological advancements, the arrival of the digital age, the outsourcing phenomenon, etc. Despite these developments, the elemental direction of consumption growth has not modified. Each recent innovation simply shifted spending from one sector to a different; They didn’t increase overall spending growth. Why? Due to consumer financing constraints.
These restrictions, and the way in which fiscal and monetary policymakers reply to them, will shape the U.S. economic outlook for the foreseeable future.
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Photo credit: ©Getty Images / Drazen Zigic
