After putting the trauma and volatility of the pandemic behind us, the economy has grown at a healthy 2.8% annual rate for the past four years. Many economists were surprised by this strength because they underestimated the strength of the consumer. Despite high inflation and interest rates as well as the fear of recession, consumer expenditures grew at a 3.6% annual rate net of inflation from the beginning of 2021 through December of 2024. Take a look at what has happened since.
While there have been some wiggles, spending seems to be leveling off, and the June figure was actually slightly below the December level. As discussed in my recent blog, (Is the Tight Labor Market Finally Easing?) there are signs that job creation has slowed materially. Moreover, credit card debt has increased almost 50% since the beginning of 2021. Finally, uncertainty regarding tariff policy may well be impacting buying plans. These three factors probably go a long way toward explaining what appears to be increasing caution on the part of consumers. There are always month-to-month fluctuations in economic data, and this represents a small decline. Nevertheless, given that the consumer accounts for about 70% of the overall economy, this is a statistic we need to watch very closely.