Consumption makes up roughly 68% of the US economy, so any discussion of a soft landing cannot ignore the health of the consumer. Despite evident signs of a slowdown relative to the post-pandemic “revenge spending” period, the outlook for consumer spending remains strong given the excellent financial shape of US households.
From a balance sheet standpoint, households are in the strongest position they have been in a long time:
- On the asset side of the ledger, households are benefiting from a massive wealth effect. Federal Reserve data as of Q2 2024 showed that households total assets rose to a new all-time high of $173.7 trillion, propelled by gains in real estate and equity holdings.
- Meanwhile, households have been in a 15-year deleveraging cycle that kicked off following the Global Financial Crisis and resulted in household debt as a percentage of GDP falling to 23-year low (see chart below).
- As a result, households net worth (i.e. assets – liabilities) also rose to a new all-time high of $163.8 trillion in Q2 2024.
Household Debt as a Percentage of GDP is Back to 2001 levels
Source: Ned Davis Research, based on data from the Federal Reserve, as of 3/31/2024
From an income statement perspective, the recent softening of the labor market continues to look like a normalization from the red-hot post-pandemic years to a more sustainable pace of growth, rather than something more ominous:
- Last Friday’s payrolls report beat all estimates with 254 thousand new jobs created in September, the highest in six months. And, after raising concerns when it rose to 4.3 percent in July, the unemployment rate declined for the second consecutive month to 4.1 percent (see first chart below).
- Other labor market indicators, such as layoff announcements and initial unemployment claims, remain muted. A reduction in job openings and a slowdown in the pace of hiring have so far been sufficient to bring the labor market back into balance.
- While nominal wage growth has been slowing, so too has the inflation rate. As a result, real wages are still growing at near the fastest clip of the past three years.
Employers Added the Most Jobs in Six Months in September, Topping All Estimates
Source: Bloomberg, based on data from the Bureau of Labor Statistics, as of 10/4/2024
Adjusted for Inflation, Wages are Growing at Near the Fastest Rate in Three Years
Source: CW Advisors, Bloomberg, based on data from the Bureau of Labor Statistics, as of 10/4/2024
Bottom line: healthy household balance sheets and positive real wage growth should continue to support consumer spending, a key component for a soft landing.
Sauro Locatelli CFA, FRM®, SCR®
Director of Quantitative Research
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