Will Consumer-Led Economic Recession Happen in the United States?

Economists suggest that the shopping frenzy brought on by the US stimulus plan is coming to an end, and the decrease in consumer spending may indicate an impending consumer-led economic downturn.

Consumers have begun to rein in their spending, which could put pressure on the economy as robust consumer spending has been a key driver of economic growth in recent years. According to US Census data, retail sales saw a slight 0.1% increase in May, but sales over the past three months have seen a year-on-year decline of 1.3%.

Economist David Rosenberg recently pointed out that this trend has intensified, leading to a 4% drop in retail sales in the first quarter, sending a strong signal that the long-awaited consumer recession is on the horizon.

Rosenberg stated in a report to clients this week, “Weak consumption can now be seen as a ‘trend’…With second-quarter real retail sales ‘growth’ now negative, following a 4.4% decline in the first quarter, early signs of a consumption recession are finally emerging.”

Traditionally, in the face of a series of inflationary pressures and a cooling job market, people tend to open their wallets and spend, but this time they have refrained from doing so.

A recent survey by McKinsey identified rising living costs and labor shortages as the primary reasons for the decline in consumer confidence. Among respondents surveyed by the consulting firm, 55% expressed either “pessimism” or “mixed feelings” about the economy for the second quarter.

Deutsche Bank strategists stated in a recent report, “Overall, consumer attitudes remain subdued relative to pre-pandemic levels, likely due to concerns about ongoing inflation and rising interest rates.” They added, “While the labor market appears robust on the surface, consumer confidence in the job market has begun to decline, indicating that unemployment rates could rise soon.”

In terms of consumers’ financial conditions, particularly those of low and middle-income households, the situation is worse than last year. According to Federal Reserve data, credit card delinquency rates have reached their highest level in 13 years.

Meanwhile, McKinsey’s survey found that 76% of consumers engaged in “downgrade consumption” in the first quarter, such as seeking cheaper goods or opting for less expensive brands.

“Consumers have exhausted their funds and started borrowing.” Stephanie Pomboy, a senior forecaster and commentator who accurately predicted the 2008 financial crisis, said in a recent interview on the “Thoughtful Money” podcast, “They (consumers) have spent all their money, and even more, just to meet basic living needs.”

According to McKinsey’s survey, 37% of consumers plan to cut back on takeout expenses, 35% intend to reduce spending at restaurants, over 30% plan to decrease expenses on both international and domestic flights, and 32% plan to reduce spending on alcohol.

These spending cuts are likely to impact GDP. After experiencing several strong quarters in 2023, GDP has started to soften. Economic growth in the first quarter of this year was 1.6%, compared to 4.9% and 3.4% in the third and fourth quarters of last year, respectively.

According to the New York Federal Reserve Bank’s forecast, there is a 52% chance that the US will be in a recession by May next year.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted in a report this week regarding total consumption, “The growth in the third quarter may further slow down. Economic slowdown is real and still unfolding.”