Together with the surge in investments brought about by the CHIPS and IRA acts, plus the recent surge in AI investment, US consumers continue to be the backbone of the US economy. When, and if, AI investment slows down or comes to a sudden stop, the US consumer will remain the backbone of the economy, even if a stop in AI investment has the potential to trigger a recession. Although investment is a smaller part of the US economy compared to consumption, it is, typically, the most volatile component of GDP. The personal consumption expenditures component is not only the largest component of the economy but also the most stable one.
As we have said in the past, after the pandemic, US consumers were awash in cash due to accumulated savings from government income transfers and lack of opportunities to spend during the pandemic. At the same time, inflation was accelerating, and interest rates were increasing. Today, although savings are still considerable, they pale compared to the excess savings accumulated during the pandemic. However, inflation is rearing its ugly face again due to the effects of tariffs.
Although the stability of the consumer depends on its ability to generate labor income, i.e., wages and salaries, households’ financial conditions are very important in supporting the stability of consumption. If we look at household debt service payments as a percentage of disposable personal income in the graph below, we see a pattern similar to that during the recovery from the pandemic recession, as this debt service ratio has remained relatively low. Even the large increase in mortgage rates has not been an important source of stress in households’ financial conditions, as borrowing has remained limited.
However, the similarities probably end there. The numbers above are aggregate numbers and don’t show what is happening with the different household income groups of the economy. The current environment has been very different for lower-to-middle income households than was the case during the recovery from the pandemic recession. At that time, lower-to-middle-income earners were benefiting from a strong labor market and a strong increase in wages and salaries. This, however, is not the case today, as the graph below clearly shows.
Furthermore, the recent talk about a bifurcated economy is not very far from where we are today, as those in the upper income levels are doing very well while the rest of Americans are struggling.
Today’s consumer resilience at the lower-to-middle income levels is being challenged by a weakening jobs market, a weakening economy, pricing pressures from tariffs, and a government shutdown, which affects about four million Americans (~two million federal workers and ~two million military personnel) who are not collecting their salaries, etc.
Furthermore, there have been two major drivers pushing consumption higher this year. The first one has been the stock market’s wealth effect. However, we know that the benefits of stock market gains do not go to the majority of Americans. The majority of Americans do not hold stocks (outside of retirement accounts) and are struggling under the pressure of higher prices and weaker increases in salaries and wages. The second major driver of consumption this year has been tariffs as well as the end of subsidies for electric vehicle purchases. Although the first driver will remain real as long as the stock market continues to push higher, the second driver is just a readjustment in consumption between today and tomorrow, especially for the purchase of durable goods. That is, higher tariffs and the end of subsidies on electric vehicle purchases tend to push consumption higher today, but it takes away from consumption in the future, as consumers tend to purchase ahead of the imposition of tariffs or the end of subsidies and ahead of anticipated future price increases.
These are the reasons why we are expecting a weaker economy during the last quarter of the year and why we believe the Federal Reserve is going to cut rates after the Federal Open Market Committee meeting in December. However, the government shutdown and the lack of data make monetary policy decisions very risky, and Fed members are going to have to come to grips with the risks associated with cutting rates in this environment.
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Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.
The FHFA HPI is a broad measure of the movement of single-family house prices. The FHFA HPI is a weighted, repeat- sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
The ISM Manufacturing Index: The GDP Now Institute of Supply Management (ISM) Manufacturing Measures the health of the manufacturing sector by surveying purchasing managers at manufacturing firms. The survey asks about current business conditions and expectations for the future, including new orders, inventories, employment, and deliveries.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 10/17/2025
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