A triad of strong wage growth, a considerable cash stockpile, and ample borrowing capacity fueled explosive growth in consumer spending in the early stages of the explosive resurgence that followed the COVID-19 shock to the economy. It was the strength of U.S. consumer spending, supported by massive fiscal stimulus, that fueled the strong recovery in growth that followed.
One by one, the strength of those catalysts has faltered — a reality that’s increasingly evident in a broad swathe of data, including today’s revised report on Q1 GDP.
Job creation remain solid, but labor conditions have clearly come off the boil. Wage growth has dropped as the competition for labor has cooled and voluntary turnover has ebbed. Excess savings that had rapidly piled up have been largely, if not completely, exhausted. The sharp reduction in outstanding credit card balances has been reversed, as outstanding consumer credit has surged in recent years, limiting the ability of many households to continue spending at the same pace they have in recent years.
The result? Personal consumption expenditure growth moderated to just 1.5% in Q1, with growing evidence that it’s stalled further in recent months. More than any other factor, that helps to explain the sharp slowdown in the economy since the beginning of the year.
More broadly, the final report on GDP indicated that growth slowed to just 1.4% in Q1, a considerable deceleration from its brisk 4.1% growth pace in the latter half of 2023.
The bifurcation of consumer spending preferences remains significant, as spending on goods contracted by 2.3% for the worst quarterly result since Q3 2021. Spending growth on services held relatively steady at 3.3%. Consumers are becoming more cautious in their spending but are still leaning into service-related spending, which had been much slower to recover coming out of COVID-19-related lockdowns and peak social distancing.
Arguably, the domestic picture isn’t as bad as the lackluster top-line growth number would suggest, as adjustments for inventories and trade shaved about 1% from top-line growth. Even so, other data corroborates the consumer story — one in which the collective mood remains cautious, and consumers are increasingly reining in spending.
The bottom line? An array of retail, labor, and consumer data all point to an economy that’s slowing as households grip their pocketbooks a bit more tightly. That’s apparent in the most recent estimates of Q1 GDP and appears likely to be even more clear in the Q2 data when it’s released in late July.
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