How is the consumer doing, and what are the numbers to keep track of to find out? We have not seen much in the way of economic data, post-tariff implementation, that shows anything meaningful. In fact, last week’s non-farm payrolls suggest the economy is still robust.
But tariffs are a tax, and although the revenues will be used within the economy in other ways, such as defense spending, the US economy is predominantly consumer-driven. If you minimize the consumer’s capability and remove what would otherwise be going into the consumer-led economy, that portion of economic activity will be diminished.
Therefore, continually analyzing how consumers are reacting would give a strong indication of how the overall economy will perform.
My Initial Thinking
Mostly, it is still too early to tell how consumers will react to the tariffs. On the one hand, many individuals and businesses have gotten in front of the tariffs and pre-ordered products. On the other hand, it is now merely a waiting game, as the tariffs will ultimately be removed.
Since the courts have already ruled that the tariffs are unconstitutional, consumers may wait out many expenditures until the tariffs are lifted. This could temporarily drain economic activity.
Expenditures versus Savings
The chart above represents the Personal Savings Rate. This is the actual amount that Americans have in savings. The numbers are inflation-adjusted; therefore, comparing past years to present will give a sense of what the consumer is doing with their money.
Savings are increasing. However, there have been other years when the savings levels were higher.
Two things to consider:
Overall high costs may have strapped the consumer and cannot save more; and/or,
Meaningful savings have yet to kick in.
The above chart is one chart. The next chart shows the growth rate of savings:
Mostly, the personal savings rate is near median levels. While there has been a minor increase in the pace of savings lately, it may still be too early to get an indication of how the consumer is reacting.
In many ways, these data points will become worrisome. The consumer now knows that the tariffs will be removed. There is a significant incentive to wait to make purchases. If the consumer continues to hold off on purchases and, in the meantime, saves a considerable amount of income, potentially within a year, there will be significant amounts of pent-up demand. Then, the consumer may unleash and spend.
For now, sentiment remains near historically low levels. I believe the consumer will take a wait-and-see approach to the tariffs. Because of that, sentiment will be a key indicator to watch.
Overall, I think consumers will start to save over the next year while also paying down as much debt as possible. On the one hand, this will erode economic demand. But, there may be a bigger surge later next year when the tariffs are removed, debt has been paid down, and the consumer catches up.
This is what I am looking for, that the cosnumer will save money instead of making purchases that may be discounted any day from here. Also, the consumer is going to pay down revolving debt. Both of these acts will put the consumer in an excellent position in a short period of time. Once the tariffs are removed, the consumer is going to be in a strong position with lower debts and higher interest rates.
The stock market will price this in, however; getting ahead o fthe stock market may prove to be tricky.
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