"Do not underestimate American consumers", the "main engine" of the US economy is still roaring!

There is an old saying, "Don't bet against American consumers." This wisdom was confirmed in the spring and summer of this year when betting on their defeat was a mistake. After cutting spending in the first three months of the year, Americans increased their spending on new cars, furniture, consumer electronics, entertainment, takeout food, and more from April to June. In the second quarter, consumer spending rebounded rapidly, recording an annualized growth rate of 2.3%, higher than the sluggish 1.5% in the first quarter. This is not far from the pre-pandemic quarterly growth rate of 2.6%, all of the above data have been adjusted for inflation. Of course, one important reason why Americans increased their spending is that prices for almost everything are rising. Costs related to transportation such as rent, groceries, and transportation-related expenses like car repairs and insurance have placed a heavy burden on households. Nevertheless, the growth rate of consumer spending still exceeds inflation. Americans continue to purchase or pay for services such as dining out or traveling, expenses they typically avoid if they feel financial pressure. Many Wall Street economists do not believe that consumer spending can sustain economic growth at an above-average pace. Household consumption accounts for about 70% of overall economic activity in the United States. Sam Bullard, Senior Economist at Wells Fargo, said, " We believe that consumer spending will face challenges in the coming months. You can already see rising loan default rates. High prices and high interest rates are having an increasingly larger impact on the economy." Undoubtedly, Americans are feeling greater financial pressure. What are the early warning signs? According to research by the Federal Reserve, more and more people are starting to default on credit card and auto loan payments. Americans are facing high interest rates and a 20% price increase over the past three years. Buying a home or applying for a car loan is particularly expensive, as zero-interest car loans have become a thing of the past. Meanwhile, as wage growth returns to normal and the labor market cools down, the surge in income after the pandemic is gradually disappearing. Most households have depleted all the savings accumulated during the pandemic from government stimulus spending and social distancing, with the savings rate dropping to a 3.4% low in June, the lowest in 18 months and only half of pre-pandemic levels. American dissatisfaction is already showing. Biden's approval ratings are low, trailing behind Trump before dropping out of the presidential race. At the same time, consumer confidence surveys have dropped to the lowest levels since last fall. The latest consumer sentiment index reached the lowest point in eight months, mainly due to increased pressure on middle and low-income families. For these reasons, many economists believe that the surge in consumer spending in the second quarter is unlikely to continue. JPMorgan economists wrote in a new report, "There are signs that, especially low-income families, are under pressure, and consumer confidence has been moving in the wrong direction." However, despite this, "betting against American consumers" still seems to be an unwise choice. First of all, with the easing of price pressures, income growth is faster than inflation - even if income growth is only barely faster than inflation. Despite a slight increase in the unemployment rate, the labor market remains quite healthy. The proportion of working-age population aged 25 to 54 is steadily increasing, currently approaching historical highs. Millions of households have locked in ultra-low mortgage rates during the pandemic, resulting in extra cash every month. Furthermore, the historic surge in the U.S. stock market has also increased the income of high-income households. For consumers, the best news may be that the Federal Reserve may soon lower interest rates due to slowing inflation. Lower borrowing costs will make it easier to purchase cars, obtain mortgages, or refinance at lower rates. Robert Frick, corporate economist at Navy Federal Credit Union, said, "Overall, with inflation month-over-month growth slowing and wage growth still strong, workers' purchasing power is increasing." He added, "But the best news is that slowing inflation is likely to solidify the trend of the Fed's upcoming rate cut, reducing borrowing costs will give the economy a shot in the arm."