This week the preliminary read on U.S. GDP showed the economy grew at an annualized rate of +1.1% during the first quarter of 2023, below consensus expectations of +1.9% and below the prior quarter’s rate of +2.6% (Exhibit 1).1 Inventories, which are essentially the stockpile of unsold goods already produced by businesses, were the main drag on growth, taking off 2.3 percentage points from the overall growth rate.2 Outside of inventories, business spending pulled back slightly but consumer spending, which accounts for about 70% of all economic activity, remained resilient – even in the face of tightening monetary policy.
As we look ahead to the coming quarters, the growth story is likely to be a bit more mixed. Consensus expects full-year 2023 GDP growth of +1.2% which, after excluding first quarter’s economic activity, implies sluggish to muted growth for the remainder of the year.3 Many economists expect deteriorating credit conditions, a softening labor market, and the potential of a mild recession to weigh on consumption and the consumer. However, thus far, credit tightening has yet to meaningfully impact the consumer, the unemployment rate remains near historical lows, and the consumer remains in good standing. While the macro backdrop may look foggy, we think a closer look reveals upside risk and reasons to remain cautiously optimistic on the state of the consumer over the near-term.
1. Retail sales look marginally healthier than the headline number suggests, and high frequency data supports this.
Headline U.S. retail sales declined by -1.0% month-on-month (MoM) in March, below the -0.5% MoM consensus expectations, with the major drag stemming primarily from gasoline sales and motor vehicles.4 However, the control group, which excludes auto, gas, and building materials, and feeds into GDP, fell by a more modest -0.3% MoM (vs. the -0.5% MoM expectation) as consumers continue to spend at non-store retailers.5 In fact, high frequency data on credit card spending suggests that the slowdown in headline consumption in March may have reversed in April. The spending data from the Bureau of Economic Analysis for the week ending April 18 showed card spending advanced nearly 15% compared to pre-pandemic baseline levels with the four-week moving average running at 13.3% (Exhibit 2).6 This suggests consumers remain in good standing – a positive sign for consumer health and the broader economy.
2. So far this earnings season, companies have been upbeat on the consumer.
Company guidance and commentary on the state of the consumer has been relatively upbeat, on a net basis. JPMorgan’s Jamie Dimon said on the company’s earnings call that “consumers are still spending and have strong balance sheets.”7 Bank of America also echoed similar sentiments in their earnings presentation conveying consumer spending remains strong.8 Visa’s CEO said the company believes “the consumer is still in good shape” with spending remaining “very strong across services, strong across travel and entertainment, strong in nondiscretionary.”9
3. Real disposable income has grown meaningfully post-pandemic and is set to rise further.
Since 2019, consumers have increased their real spending power by roughly $250 billion annually.10 Looking ahead, real disposable incomes are expected to grow by another +3.75% in 2023 (+7.0% nominal growth) reflecting positive – though moderating – wage growth, rising interest income and a lower effective tax rate (Exhibit 3).11 If consumers were to spend the majority of their income gains in 2023, consumption could grow +2.5% and contribute an additional +0.5 percentage points to overall GDP growth in 2023.12
4. Consumer balance sheets remain in healthy condition despite a drawdown in excess savings.
Consumer balance sheets remain robust despite the recent drawdown in excess savings.13 Consumers currently hold roughly $1.5 trillion in excess savings – a roughly 40% drawdown from the near $2.5 trillion peak in September 2021 – with the number expected to fall another $500 billion by the end of 2023.14 Still, while the consumption tailwind from excess savings is likely in the rear-view for the bottom quartile of income earners, those in the top two quartiles may continue to support consumption. Together, the top half of income earners hold nearly 70% of excess savings and account for 60% of overall consumption.15 The residual excess savings may serve as a cushion to spending in the event of economic shocks.
Meanwhile, household credit balances have stayed in check. Household leverage, debt servicing costs, and delinquency rates all remain low by historical standards.16 The ratio of liabilities to net worth is down 50% from 2008, suggesting household leverage is solid (Exhibit 4).17 Debt service costs have risen from post-pandemic lows of 8.3% to 9.7% today but remain below the pre-pandemic level of 9.8% and well below the 40-year average of 11.1%.18 The impact from higher rates will likely lift debt service costs marginally higher, but for now, overall delinquencies remain subdued.
We think consumption can continue to support economic growth, provided that the unemployment rate remains depressed. Thankfully, job openings remain elevated at 9.9 million and there are still roughly 4 million more open jobs than there are unemployed people in the U.S., suggesting the unemployment rate may remain low and consumption may remain robust.19 This, in turn, can support equity markets without having to price in an imminent recession.
1. Source: Bloomberg, Bureau of Economic Analysis, iCapital Investment Strategy, as of April 27, 2023.
2. Source: Bloomberg, Bureau of Economic Analysis, iCapital Investment Strategy, as of April 27, 2023.
3. Source: Bloomberg, iCapital Investment Strategy, as of April 27, 2023.
4. Source: Bloomberg, U.S. Census Bureau, iCapital Investment Strategy, as of April 27, 2023.
5. Source: Bloomberg, U.S. Census Bureau, iCapital Investment Strategy, as of April 27, 2023.
6. Source: Bureau of Economic Analysis, iCapital Investment Strategy, as of April 27, 2023.
7. Source: JPMorgan Q1 2023 Earnings Call, iCapital Investment Strategy, as of April 14, 2023.
8. Source: Bank of America Q1 2023 Earnings Presentation, iCapital Investment Strategy, as of April 18, 2023.
9. Source: Bloomberg, Visa, iCapital Investment Strategy, as of April 26, 2023.
10. Source: Goldman Sachs Research, as of March 5, 2023.
11. Source: Goldman Sachs Research, as of March 5, 2023.
12. Source: Goldman Sachs Research, as of March 2, 2023.
13. Note: Excess savings is defined by observed savings minus savings level implied by pre-pandemic savings rate. Said another way, it is defined as the amount that the components of DPI exceed their trend with the amount that PCE and other outlays are below their trend.
14. Source: Federal Reserve, Bureau of Economic Analysis, iCapital Investment Strategy, as of April 2023.
15. Source: Federal Reserve, Bureau of Economic Analysis, iCapital Investment Strategy, as of October 21, 2022.
16. Source: Bloomberg, iCapital Investment Strategy, as of April 27, 2023.
17. Source: Bloomberg, iCapital Investment Strategy, as of April 27, 2023.
18. Source: Bloomberg, Federal Reserve, iCapital Investment Strategy, as of April 27, 2023.
19. Source: Bloomberg, iCapital Investment Strategy, as of April 27, 2023.
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