While many investors and economists have crossed over into the sunny lands of soft landing, the major concern remains that the US consumer is about to crack. There is growing consensus that the US economy is just beginning to feel the effects of the central bank’s aggressive monetary policy tightening and the impact of rate hikes is beginning to ripple through credit markets, with delinquency rates on credit cards rising.

With the US is still on a bumpy road to fully taming inflation, the economy is encountering two new challenges: A potential government shutdown that could dent confidence and growth, and an unprecedented strike against all three of the legacy Detroit automakers. Stocks fell sharply on Friday, with risks rising from the UAW auto strike, the first time in the union’s 88-year history that all three major automakers were targeted simultaneously. The Dow Jones average eked out a positive week, up 0.1%, but the S&P 500 and Nasdaq Composite closed their second straight week of losses, down by a respective 0.2% and 0.4%.

Future Wealth’s View

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.8% last month. While consumer spending is holding up the economy for the moment, households are drawing down excess savings accumulated during the COVID-19 pandemic. Student debt repayments resume in October for millions of Americans and higher borrowing costs could make it harder for consumers to keep using credit cards to fund purchases.

It is important to peel the layers to look at specifics of consumer spending – As the Federal Reserve has pushed rates higher, there’s been a clear impact on the housing market, car buying and other big ticket purchases that consumers would take out a loan for, but cash and credit card purchases at restaurants and stores haven’t slowed. The important metric to keep an eye on is credit card delinquency rate, which is already rising. 

Where will this all end? – The optimistic scenario that Wall Street is married to is that by 2024, we will have lower inflation, lower interest rates and a more balanced degree of spending between goods and services. If that plays out, we will have the beginnings of the next bull market. Else, all bets are off.