Taking the Pulse of the US Consumer

Our panel of analysts discusses the health of the US consumer through the lens of spending, credit use and home ownership. 

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James Egan: Welcome to Thoughts on the Market. I'm James Egan, Morgan Stanley's co-head of Securitized Product Strategy, and today we're going to take a look at the state of the US consumer from several different perspectives.

Recent economic data suggests that the US economy is strong, and that inflation is on a downward trend. Yet, some of the underlying performance data is a little bit weaker. To understand what's happening, I'm joined by my colleagues Arunima Sinha and Heather Berger from the Global and US Economics teams.

It's Thursday, November 7th, at 10am in New York.

Now, the macro data on the consumer has looked pretty strong. Arunima, can you give a little bit more detail here? And specifically, how has consumer spending in the US been trending relative to where it was last year?

Arunima Sinha: So, a good place to start, Jim, would be just to see where consumption spending was last year. And there it ended on a strong note. And in the first three-quarters of 2023, the average quarterly analyzed growth for consumption was just under 3 per cent. And that's where we are this year. We've seen solid growth rates in all three quarters this year, with the third quarter at 3.7 per cent. A particularly interesting aspect has been that the spending on goods has actually accelerated this year, with the third [quarter] number at a blistering 6.0 per cent on a quarterly basis.

We have chalked this down to labor income growth remaining robust; and we did an analysis which showed that past growth in labor income boosts real consumption spending. Over this year, labor compensation has been growing strongly. So over 6 per cent in the first quarter and about 3.5 per cent in quarters two and three.

And so, we continue to expect that that solid labor income growth is going to continue to boost real consumption spending.

James Egan: All right. So, if I'm hearing you correctly – good spending, holding up; services, holding up. What about discretionary versus non-discretionary spend?

Arunima Sinha: That's a great question, Jim, especially because discretionary spending is 70 per cent of all nominal personal consumption spending in the US. So just for context, what does discretionary include? It's going to be all the spending on durable goods, some non-durables, and then non-essential services such as health and transport, financial services, etc. And what we also saw – that a larger share of labor income is now being spent on discretionary items relative to the pre-COVID phase.

So where are growth rates running? Discretionary spending is running strong on both a nominal and a real basis. So, on a nominal basis, we have about 5.5 to 6 per cent year on year, over this year, and over 3 per cent on a real basis. And these are largely in line with pre-COVID rates, if a little bit stronger now.

For non-discretionary spending – that's the spending on food at home, and clothing, energy, and housing services – nominal spending has been decent. So, 4 per cent year on year on the first three quarters this year, and real spending has been a little bit less than the pre-COVID rate. So, between 0.5 per cent to 1 per cent. And so, this suggests what we expected to see, which is there's likely greater price sensitivity among consumers for these non-discretionary categories.

What do we see going forward? We think that those increases in labor income are going to continue to provide boosts to discretionary spending. And one of the interesting aspects that we found was that lending standards seem to matter for discretionary spending. So, there's been some slowing down and the tightening of lending standards – and that could provi