State Of The Consumer

In our Annual Outlook for 2023, we raised the possibility that the US economy could potentially avert recession in 2023, powered by full employment and robust consumer spending. Thus far, with roughly a month left in the 2nd quarter, the US economy has proven itself surprisingly resilient, with GDP growth of 1.3% in Q1 and unemployment at just 3.4% in April. The economic growth in the first quarter was largely attributable to strong consumer spending despite persistent price increases for both goods and services. The US consumer’s willingness to absorb price increases passed on by corporations has created an environment of record-high profit margins and resulted in strong first quarter 2023 earnings with over 76% of S&P 500 companies beating analysts’ expectations, the best rate since Q1 of 2022.

If the fate of the US economy rests in the hands of the American consumer, there could be major trouble on the horizon, as warning signs are starting to appear in several indicators. There is growing evidence that the US consumer is close to tapped out, and if so, we could finally see an earnings recession in the latter half of the year, which could spiral into an economic recession while the Fed still struggles to make headway on inflation. In this commentary, we will examine why consumers have been so willing to spend, and what could trigger them to cut back in the coming months.