How resilient is US consumer spending amidst rising interest rates?

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US Consumer Spending Shows Resilience Amidst Rising Interest Rates

US consumer spending, which constitutes over two-thirds of the nation's economic activity, has demonstrated notable resilience despite a series of interest rate hikes. While the overall economic growth rate in the second quarter was revised downwards, underlying momentum in consumer spending, supported by a tight labour market and elevated wage growth, appears to have picked up. This strength is further evidenced by robust retail sales figures for July and strong performance in single-family homebuilding.
Robust Labour Market Underpins Consumer Activity

A key factor contributing to the sustained consumer spending is the persistent tightness in the US labour market. Even as job growth shows signs of slowing, employers are retaining their workers, a trend influenced by past hiring challenges. This environment of high employment levels and elevated wage growth provides consumers with the financial capacity to continue spending, thereby supporting overall economic activity.
Inflationary Pressures Moderating

Inflationary pressures within the US economy have moderated, providing some relief. The government's price index for gross domestic purchases saw a slower rate of increase in the second quarter compared to the first. Similarly, the personal consumption expenditures (PCE) price index, a key metric watched by the Federal Reserve, also showed a significant slowdown, particularly in its core component excluding food and energy. This cooling inflation, combined with continued spending, fuels optimism for a potential economic soft landing.
Economic Growth Exceeds Non-Inflationary Rate

The US economy is currently expanding at a pace that exceeds the approximately 1.8 per cent rate considered by Federal Reserve officials to be non-inflationary. In the second quarter, Gross Domestic Product (GDP) increased at a 2.1 per cent annualised rate, a figure revised down slightly from initial estimates but still indicating expansion. This persistent growth, despite 525 basis points of interest rate hikes since March 2022, highlights the economy's underlying robustness.
Mixed Indicators in Gross Domestic Income

While GDP offers one perspective on economic activity, the Gross Domestic Income (GDI) presents another. In the second quarter, GDI rebounded, growing at a 0.5 per cent rate after contracting in the first quarter. The average of GDP and GDI, often considered a more comprehensive measure of economic activity, showed an increase of 1.3 per cent in the second quarter, up from a marginal 0.1 per cent growth in the preceding quarter. This suggests a complex but generally positive economic picture.

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How resilient is US consumer spending amidst rising interest rates?

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