Yardeni Research | When American Consumers Are Depressed, They Go Shopping!

💡The US economy's resilience in the Roaring 2020s thesis is primarily attributed to rapidly proliferating technologies driving a productivity boom, which supports stronger economic growth while containing inflation, boosting real wages, widening profit margins, and lifting corporate earnings. This framework, introduced in August 2020, suggests the economy has consistently defied negative outlooks, with consumer spending remaining robust despite affordability concerns, elevated interest rates, and low consumer confidence, particularly evident in strong consumption data.

💡Bank of America's September Consumer Checkpoint survey data indicate robust consumer spending resilience, with credit and debit card spending per household up 6.2% year-over-year, or 5.1% excluding gasoline; both rates were the third strongest in four years. Retail spending, excluding gasoline, increased 3.5%, while services spending rose 5.4%. Nearly 86% of more discretionary retail categories registered spending gains, accounting for over 94% of spending in these categories, and transaction counts increased in 71%, suggesting more purchases rather than solely higher prices.

💡Consumer spending growth has recently broadened across different income groups, reversing a trend from 2025 and early 2026 where high-income households led growth. In September, Bank of America reported that card spending per household increased 5.5% year-over-year among lower-income consumers, compared to 4.9% and 4.8% for middle- and higher-income households, respectively. Only the top 5% of earners saw slightly faster growth at 5.9%, driven by wealth rather than solely wage gains, and discretionary spending growth has become more balanced across these groups, supported by after-tax wage and salary growth reaching 4.5% year-over-year for lower-income households.

💡Consumer spending remains robust despite depressed consumer sentiment primarily due to the wealth boom, which reached a record $185.6 trillion in household net worth in Q2, representing a 52.5% increase since Q4 2020. This substantial wealth, especially among asset-rich Baby Boomers, allows households to sustain consumption without relying exclusively on current income. Additionally, forward-looking measures from the New York Fed's September Consumer Expectations survey indicate rising expected spending growth (5.5%) and income growth (3.1%), alongside a decreased perceived probability of job loss (13.5%), suggesting consumers may be feeling more optimistic about their future prospects than current sentiment indices reflect.

💡The divergence where consumption growth outpaces disposable income growth is primarily explained by the wealth boom. In August, real consumption increased 2.6% year-over-year, while real disposable income grew only 1.3%, marking the seventh consecutive month of this trend. Since January 2020, real spending has climbed 19.1% versus 16.2% for disposable income. This phenomenon is supported by household net worth reaching a record $185.6 trillion in Q2, up 52.5% since Q4 2020, as wealthier households feel less need to save from current income, leading the personal saving rate to fall to 4.1% in August, its lowest since November 2022.

💡Yes, the personal saving rate could turn negative by the end of the decade, as more Baby Boomers draw on their accumulated wealth rather than saving from current income. Extrapolating recent trends suggests that real consumption could exceed real disposable income around 2030. This potential sub-zero saving rate should not cause alarm, as asset-rich retirees can sustain their consumption without needing to rely exclusively on current income, leveraging their substantial household wealth from earlier working lives.

💡Three primary inflationary shocks are currently exerting upward pressure on prices in the US: the AI buildout, rising oil prices, and tariffs. Additionally, the resilient economy is contributing to services inflation, further complicating the Federal Reserve's efforts to achieve its 2.0% year-over-year inflation target. These factors increase the risk of secondary inflationary effects, where businesses and workers might embed higher inflation into pricing and wage decisions.

💡The Federal Reserve considers 'insurance hikes' despite ongoing inflation shocks because the longer inflation remains above target while shocks persist and demand stays strong, the greater the danger of second-round inflationary effects. These effects could lead businesses and workers to embed higher inflation into prices and wages, potentially necessitating more aggressive monetary tightening later. By raising rates now, even if they cannot directly reverse the shocks, the Fed aims to lean against this risk and prevent higher expected inflation from becoming entrenched, thereby reducing the probability of needing harsher measures in the future.

💡Consumer inflation expectations have shifted higher according to recent surveys. The New York Fed's September survey showed consumers expect inflation rates of 3.9% year-over-year in one year (the highest since May 2023), 3.3% in three years, and 3.0% in five years. The University of Michigan’s preliminary October survey reported year-ahead expectations at 4.7% and longer-run expectations at 3.5%. While longer-term measures remain comparatively stable, the rise in shorter-term readings is a notable concern, signaling a potential de-anchoring of expectations.

💡Market-model estimates suggest longer-term inflation expectations are drifting higher, even if breakeven inflation rates appear calm. The Fed’s D’Amico-Kim-Wei (DKW) model, which separates inflation expectations from risk and liquidity premiums, estimated the 10-year expected inflation at 2.90% on September 30, matching its historical average. More significantly, the five-year estimate reached 2.92%, exceeding its 2.89% average. Both measures have climbed from earlier lows, particularly the five-year measure recently, indicating that relatively calm breakeven rates may be masking underlying increases in model-implied inflation expectations.