The US consumer is slowing

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. Seven hours after this letter lands in your inboxes, the much-awaited US January jobs report will appear. The labour market has stabilised lately, despite some indicators pointing at a slowdown in demand last month. But with recent softening in consumer spending (see below) and a jittery market, a poor report could really spook people. Send us your thoughts: [email protected].

Retail sales

For several years now, US consumption has continued to expand briskly, even in the face of persistent inflation, assorted geopolitical shocks and terrible consumer sentiment. The latest retail sales data, however, confirms a suspicion we have had for several months: the consumer is slowing down a bit.

Headline retail sales growth was flat in December and a small decline in the “control group” data (which excludes volatile sectors such as cars and petrol stations) indicates the slowdown, while not large, is widespread:

It now appears the momentum peaked and began to roll over in October — just as the government shutdown ended and (perhaps non-coincidentally) when stock market leadership began to rotate from growth and tech to value and defensives.

Data on household finances also points to consumer strain. While household balance sheets remain solid in aggregate, credit card and car loan delinquencies are rising steadily, according to data released yesterday by the New York Fed:

Likewise, the personal savings rate has dropped 2 percentage points since April, putting it at its lowest level since 2008 if the pandemic years are set aside. Put this alongside slowing real wage growth and a sludgy job market, the slowdown in spending makes sense.

The gradual softening of retail sales also matches a drumbeat of comments from the leaders of consumer goods companies, describing an uncertain, penny-pinching US consumer. Here, for example, is the chief executive of biscuit maker Mondelez, Dirk Van de Put, speaking a week ago:

I think the thing in North America is the consumer. Consumer confidence is near historic lows. They’re worried about overall affordability. They are fed up with the price increases. They don’t feel good about their personal economic outlook. They [have] doubts about job security. So . . . the average shopping basket of the consumer in the US, whether you’re in the higher or in the lower social economic classes, has not increased for the last two, three years. Within that basket, they have spent more money on the basics.

The hesitant consumer is also visible in the performance of fast-food restaurants, as our colleague Taylor Nicole Rogers has pointed out in an excellent Big Read. Here is her chart of restaurant traffic and sales, showing a slowing pattern that started in the middle of last year:

All that said, it is important to keep the slowdown in perspective.

First, in the sectors where we hear the worst news about the consumer — staples, packaged food and fast food — companies raised prices very aggressively in the post-pandemic boom. This, rather than a weakening economy, surely explains some of the customer disaffection they are suffering now.

That said, it is natural that in the context of persistent high prices, weak job creation and higher interest rates, consumers would be careful about where they spend — especially consumers with less money. But this is not to be confused with consumption that is shrinking. Broadly, the US economy is OK, as evidenced by solid corporate profits, strong business investment and so on. Greg Daco at EY Parthenon noted that while the data suggests a slowdown in spending, the fact that household savings are declining is a good sign — ahead of a recession, cautious households generally drive the savings rate up.

Nor should the slowdown be confused with an economy that is fragile because of rapidly rising income or wealth inequality. In the “K-shaped economy” narrative, the economy has become more unequal recently, and now only high spending by the rich is keeping the economy out of recession. But there is little evidence of such a change, as we have argued before.

Mark Cus Babic and his team at Barclays have used a novel method to undercut the “K” story. The Bureau of Economic Analysis keeps good estimates on the distribution of income, but the numbers only go through 2023. Babic and his team extend the estimates through the third quarter 2025 by looking at the consumption of goods and services where the rich and poor are over-represented — luxury items and necessities respectively — reasoning that consumption patterns for these things would change if the rich were responsible for a larger share of spending. But they find nothing of the sort.

American consumption has long been very unequal, but there is no good reason to think that it is becoming more so. Here is Babic’s chart of personal consumption expenditures (PCE) share for income quintiles:

Consumption is slowing gently. This is not surprising or particularly worrying in itself, given how strong it has been. The question is where we go next. Hopes are high that larger tax refunds and other fiscal goodies from the Big Beautiful Budget Bill act reverse the slowdown. And, if inflation behaves itself, the stock market is steady, and the Trump administration avoids a policy blunder on the scale of “liberation day”, the stimulus should work as expected. All those risks are interrelated. Let’s hope that there are no surprises.

One good read

Oopsie.