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Written by: Jack Manley
The American consumer has been resilient in the face of significant headwinds, helping keep the U.S. economy afloat and increasing the likelihood of a "soft landing". However, while aggregate consumption has remained robust, the way the consumer is spending across categories has changed since the start of 2020. Understanding how - and why - these changes have occurred is important to understanding the longer-term prospects for the U.S. economy.
- Energy and utilities: After collapsing in the early stages of the pandemic, spending on energy and utilities jumped ~25% in both 2021 and 2022, while gasoline costs climbed to all-time highs. Since then, falling energy prices have pushed consumer spending in the category lower.
- Groceries: Supply chain issues, COVID-era fiscal stimulus and geopolitics have all kept food prices elevated, resulting in consistent - albeit moderating - increases in spending.
- Essential goods and services: While spending decreased modestly during the pandemic, this category has also seen consistent increases in expenditures since 2021, although the pace of growth has moderated.
- Interest expense: Interest expenses fell alongside rates in 2020 and continued to contract in 2021. However, when the Fed began to aggressively normalize policy this category saw explosive growth: up 20% in 2022, another 47% in 2023 and 19% in 2024, reflecting the lagged impact of changes in rates to overall interest expense.
- "Fun": "Revenge" spending drove a surge in expenditure within "fun" categories, like dining out and vacationing, with consumers, frustrated by inactivity during COVID lockdowns and flush with cash, diving back into recreation. Spending on "fun" rose by 22% in 2021, with further strong increases in 2022 and 2023. In 2024, it has continued to grind higher.
Looking forward, prospects across categories have improved, with most showing signs of stabilization. Moreover, the still-elevated components, like interest expense and “fun”, should normalize: the Fed is now in the early innings of a rate cutting cycle, which should feed into lower interest expenses; and growth in expenditure on "fun" have moderated significantly since 2021, suggesting consumers are starting to run out of enthusiasm for travel, leisure and hospitality services (at least at current prices).
In turn, lower interest costs could free up household budgets for other expenses, a reprieve from a cooling labor market and higher prices. Meanwhile, the normalization of spending on "fun" should help put downward pressure on price growth, resulting in cooler core inflation.
This combination of factors suggests the Fed should feel comfortable that a "soft landing" has been achieved, allowing rates to fall through 2026. This, as a result, should support equity markets, as lower rates make high valuations less troublesome while simultaneously improving the earnings prospects for companies that lagged the broader S&P 500; and means that fixed income investors should continue to modestly extend duration and credit in portfolios to lock in strong coupons across the quality spectrum.
Nominal consumer spending by expenditure category
Y/y % change, average level of spending
Source: BEA, J.P. Morgan Asset Management. Categories based on data from Table 2.5.4U (Personal Consumption Expenditures by Type of Product) and Table 2.1 (Personal Income and Its Disposition) from the BEA. Custom categories created by J.P. Morgan Asset Management. "Essentials" category includes goods and services deemed to be non-discretionary, including but not limited to housing and housing-related expenditures, apparel and public transportation. "Fun" category includes goods and services deemed to be discretionary, including but not limited to jewelry, foreign travel by U.S. residences and food services. Analysis does not include all expenditure categories. *YTD figure of 2024 reflects the year-over-year % change in the average level of spending during the first two quarters of 2024 relative to the average level of spending during the first two quarters of 2023.
Data are as of October 15, 2024.
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