The American economy may be on the brink of a consumer-led recession as changes in spending patterns emerge.
What Happened: Recent data from the U.S. Census indicate a 1.3% year-over-year drop in retail sales volume over the past quarter. This follows a 4% decrease in retail sales in Q1, hinting at a potential recession.
“The weakness in the consumer can now be considered a ‘trend’… Early signs of a consumer recession finally coming to the fore,” economist David Rosenberg told Business Insider.
Consumers are wrestling with inflation and a slowing job market, resulting in reduced spending. A recent McKinsey survey found that 55% of participants felt “pessimistic” or had “mixed” feelings about the economy in Q2.
Moreover, consumer finances, especially among lower to middle-income households, have deteriorated compared to the previous year. The delinquency rate on credit card loans has hit a 13-year high, as per Federal Reserve data.
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The McKinsey survey also revealed that 37% of consumers plan to cut back on takeout meals and 35% aim to spend less at dine-in restaurants. These spending reductions could affect the GDP, which has already softened after strong quarters in 2023.
The New York Fed predicts a 52% likelihood of the U.S. entering a recession by May next year.
“The slowdown is genuine, and still developing,” commented Ian Shepherdson, the chief economist at Pantheon Macroeconomics, according to Business Insider.
Why It Matters: The decline in consumer spending, a key driver of the U.S. economy, is a worrying sign. The shift in spending habits, coupled with a pessimistic outlook on the economy, could lead to a slowdown in economic growth.
The rise in credit card loan delinquencies also indicates financial stress among consumers, which could further dampen spending. As consumer spending impacts various sectors, a decrease could have far-reaching effects on the overall economy.
The potential recession predicted by the New York Fed underlines the seriousness of the situation.
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