Continued runway for U.S. consumer demand

“We continue to observe strength across consumer groups that can be sustained further,” said Josh Hirt, a Vanguard senior economist. “This is one aspect driving our skepticism that inflation will continue to ease as fast as many anticipate.”

A virtuous cycle where job growth, wages, and consumption fuel one another informs our view that consumer demand can persist.

“What’s driving consumption is this enduring cycle,” said Bob Behal, Vanguard head of structured product research. “More jobs lead to higher wages, which increases demand for goods and services, which perpetuates more jobs and fewer layoffs. Until something breaks the cycle, it’s a positive feedback loop.

“We’re not saying the consumer has endless capacity. But the data paint a healthy picture of the consumer in the near term and continuation of consumption and performance trends.”  

Evidence of resilience is apparent in all manner of consumer data. The ratio of revolving debt (credit card debt and home equity loans) to both disposable personal income and GDP growth has been surprisingly low, still falling short of its pre-pandemic trend.

“From a historical perspective, U.S. consumers in aggregate are reasonably leveraged relative to income currently and remain below levels where they were before COVID,” Hirt said.

At a more granular level, rates of auto loan delinquencies suggest that debt is manageable for most borrowers, Behal said. Delinquency rates among borrowers whose credit is rated prime—those with credit scores of 660 or higher—have barely increased over the past five years. Delinquencies have gone up for subprime and nonprime borrowers but together they comprise only a quarter of auto loans outstanding.

“Deterioration in the credit markets is isolated to a sub-segment of the population and is rising from a very low base,” Behal said. “Even though it’s a real risk, we’re not seeing broad-based deterioration. Overall consumer health remains fairly robust even though normalization is occurring.”

Higher wages, robust equity market gains, and increased savings have contributed to a wealthier, more stable consumer over the past few years, and higher home values have had an even greater impact.

“What stands out in household wealth gains since COVID is the outsized impact that housing wealth has contributed—around double the typical impact,” Hirt said. “To the degree that wealth effects support consumption, housing wealth is more comprehensive and higher-quality.”

The chart below shows the change in share of net worth from different assets in each income group. 

“What’s interesting is that, while home values have now increased the strength of all consumers, not just at the higher end of the spectrum, the middle cohorts saw the biggest gains,” Behal said. “And those middle cohorts also saw the largest wage gains.”

“All this bolsters our earlier research that there’s still capacity on the part of the consumer to keep the economy going,” Hirt said.

• A resilient U.S. economy continues to surprise (commentary, issued March 2024)
• Vanguard’s economic and market outlook for 2024 (hub page for our annual outlook)
• Consumer spending could push Fed higher (Q&A, issued April 2023)