Americans express dissatisfaction with the economy, yet their spending patterns suggest otherwise. On Friday, the Commerce Department announced a 0.6% increase in consumer spending for the month of August. While that figure may appear modest, it indicated a notably more robust growth trajectory than analysts had anticipated. According to a report, retail sales experienced an increase of 0.6% in August. Corporate earnings and sales have demonstrated resilience in the past quarter, as numerous companies report that customers persist in providing business despite apprehensions regarding a weakening economy. A revised report released Thursday regarding the second-quarter gross domestic product, the most comprehensive indicator of US economic expansion, indicated that GDP experienced its most rapid growth in nearly two years, supported by robust consumer spending.
Nevertheless, the ratings of this economy are significantly low. The University of Michigan disclosed on Friday that consumer sentiment declined to an index level of 55.1, marking the seventh-lowest reading since 1952. That’s not unexpected given that prices continue to rise, instilling a sense of anxiety in Americans reminiscent of the post-pandemic inflation crisis that escalated during the latter part of former President Joe Biden’s term. According to reports, Americans consistently identify the economy as the paramount issue facing the country. As prices continue to escalate, the annual inflation rate reached 2.9% in August, marking the highest level since January, based on data released earlier this month by the Bureau of Labor Statistics. Consequently, sentiment regarding the economy is deteriorating rapidly. President Donald Trump’s tariffs are not providing assistance. Despite polling indicating that tariffs rank as his least favorable issue – by a significant margin – Trump persists in reinforcing his remarkable trade policy. On Thursday, Trump declared the imposition of new tariffs on pharmaceuticals, furniture, trucks, and cabinetry. He assured that additional ones are forthcoming. Recent consumer price reports indicate that his tariffs are partially responsible for the gradual yet consistent resurgence of inflation.
Additionally, the hiring process has reached a complete halt. In June, America experienced a decline in jobs, marking the first instance of such a loss in any month since December 2020. And yet, the American economy continues to operate smoothly. US economy will grow at an annual rate close to 4% this quarter, which concludes on Tuesday – a remarkable outcome given the challenging combination of sluggish hiring, escalating prices, elevated interest rates, and tepid consumer sentiment. A portion of the explanation lies in the concept of “vibes,” a frequently employed yet ambiguous term that has been utilized to characterize analogous consumer behavior amid the recent inflation crisis. Despite record-low consumer sentiment, which hovers just below today’s moribund levels, individuals continued to spend throughout 2022 and 2023 as if it were inconsequential. Employment opportunities were abundant. Individuals retained a significant amount of savings accumulated during the pandemic. Consequently, consumers reduced their spending on discretionary items—having already invested in home improvements and fitness equipment during the pandemic—while maintaining their purchases of essential goods. The term “vibecession” emerged as a popular descriptor among economists during the Biden administration: while public sentiment suggested economic malaise, the underlying metrics indicated a stable economy.
This time around, certain elements are present. While the economic data appears to be trending negatively, it remains comparatively robust. Inflation is on the rise, albeit at a gradual pace, and remains far from the 9.1% annual rate recorded in 2022, which marked a four-decade peak. Job growth is decelerating; however, it continues to expand, and unemployment rates are still at historically low levels. Many Americans continue to benefit from pandemic-era ultra-low mortgage rates, which assist them in navigating price increases. “Downbeat sentiment stands in stark contrast to encouraging hard data,” stated Oren Klachkin. “Despite prevailing negative sentiments, consumer spending persists.” We place greater emphasis on the hard data rather than the soft data. Another explanation for poor academic performance in a robust economy: Affluent Americans are thriving, whereas those with limited resources are facing significant challenges. Economists refer to it as a “K-shaped” economy. Federal Reserve Chair Jerome Powell earlier this month addressed that phenomenon and explained how the bifurcation can benefit the economy as a whole, despite the struggles faced by many individuals. “Consumer spending numbers exceeded expectations, potentially reflecting a bias towards higher earning consumers. “There’s a lot of anecdotal evidence to suggest that,” Powell stated. “Nonetheless, it constitutes expenditure.” It appears that the economy is progressing steadily.
Consumer spending constitutes more than two-thirds of America’s GDP. As long as individuals continue to spend, the United States’ large and varied economy will maintain its robust performance. Recessions, by their nature, are periodic occurrences in the economic cycle. Numerous warning signs are emerging from various sectors of the US economy. Hiring has experienced a prolonged downturn over the past year, with recent monthly job gains dipping below the threshold necessary to accommodate the growth of the American population. The Black unemployment rate has experienced a significant increase in recent months, frequently serving as an indicator of impending widespread layoffs. If job growth transitions to job losses, the American economy could shift dramatically. A potential government shutdown poses a risk to the economic equilibrium, especially if the Trump administration follows through on its promise to permanently cut thousands of government positions that would be subject to furlough. There are grounds for skepticism regarding the possibility that spending has been artificially inflated in recent months. August serves as a pivotal period for consumer expenditure, particularly as it coincides with the back-to-school season, compelling many individuals to allocate funds accordingly. The forthcoming months may present challenges if consumer sentiment persists in its decline and Americans choose to curtail their expenditures. “Consumers are becoming less uncertain about the path of future inflation, but many expect higher prices,” said Klachkin. “Alongside slower income growth and high prices and interest rates, this should contribute to a moderation in consumer spending growth.”
Many Americans are shelling out on their credit cards and buy-now-pay-later loans, which carry astronomical interest rates. Last year, credit scores experienced their most rapid decline since the Great Recession, driven by rising living costs and the resumption of long-suspended student debt payments. Meanwhile, equities persist in their ascent to unprecedented levels, instilling a robust sense of invulnerability among investors. However, equities have reached yet another peak, reflecting their relative valuation in relation to corporate sales and profit forecasts. This indicates that the market has become significantly overvalued and may be experiencing an AI-driven bubble that is nearing its breaking point. Tariffs remain a significant risk to the economy as well. Despite the persistence of relatively low inflation following the historic tariffs imposed by Trump, businesses may soon find it necessary to transfer a greater share of their increased costs onto consumers. Recent producer prices reports show that wholesalers are absorbing much of the tariff costs, but their profit margins are getting significantly squeezed. Citi economist Nathan Sheets estimated that consumers have borne only about 30% to 40% of the cost of tariffs, and that balance could soon shift as company shareholders demand profit growth.