The Fragile Fortitude of American Consumers

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As the U.S. economy braces itself for the Federal Reserve’s aggressive campaign of interest rate rises, many investors are pinning their hopes on the resilience of the American consumer. However, recent data suggests that this fortitude may be on the verge of cracking.

According to Steven Blitz, chief U.S. economist at TS Lombard, the tightening measures imposed by the central bank have pushed borrowing costs relative to incomes to their highest level since the global financial crisis. This spike in costs has historically caused significant problems for households, often resulting in economic downturns.

Blitz warns that “interest expense as a percent of total wages and salaries has surged to levels that have triggered recessions in the past.” He further adds, “there are signs that the rising cost of leverage, coupled with slower job growth, will stifle consumer spending. We will have a clearer picture when August retail sales figures are released next week.”

In its latest Beige Book of business anecdotes, the Federal Reserve noted a notable decrease in consumer confidence. While spending on tourism was stronger than expected, retail spending on non-essential items continued to slow. Some districts even reported that consumers may have depleted their savings and are relying more on borrowing to sustain their spending habits.

The increasing concerns were echoed by Jessica Rabe, co-founder of DataTrek, who highlighted that the latest Beige Book mentioned “recession” 15 times, a significant increase from the three times it appeared in the July report. Rabe also noted that many districts reported higher delinquencies on consumer credit lines.

“The Fed’s latest Beige Book suggests that the U.S. economy is slowing down and consumers are becoming more price-sensitive,” Rabe cautioned. She added, “this could potentially impact corporate earnings reports in the second half of the year.”

These emerging indicators have not gone unnoticed on Wall Street, where traders are starting to exhibit signs of nervousness. The S&P 500 Consumer Discretionary index XX:SP500.25, which had previously enjoyed a strong rally of nearly 32% for the year, has recently experienced a pullback. Overall, the broader S&P 500 SPX has seen a 16% gain this year.

With the fragility of American consumers becoming increasingly apparent, investors are closely watching for any further signs of slowdown that could potentially impact the overall economic landscape.

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