- Consumer confidence is elevated, helped by moderating inflation and a strong labour market.
- Fiscal and monetary policy are both supportive of the cycle.
- Consumer debt is low, rates are coming down, and stock/property gains are substantial.
- Oil price spike could dent confidence, but overall commodity supply/demand picture is favourable.
- Key risk: “melt-up” of asset prices and spending, which could lead the Fed to scale back rate cuts.
Accounting for 4% of the world’s population, and yet around 30% of global spending, US consumers’ outlook matters critically for producers and exporters. Going into the final stretch of 2024, they look in good shape, as per a number of indicators.
Let’s begin with consumer confidence. University of Michigan’s widely followed survey show confidence about 8% stronger than a year ago and 40% higher than the recent trough, in mid-2022. Inflation fears and jobs uncertainties have receded considerably over the last couple of years, although there may not be much room left for such data to improve.
Nonetheless, there is ample tailwind for consumers. Capital gains from soaring equity and housing prices have been considerable in this cycle, mortgage rates have begun to decrease, household debt as a share of income is at a 22-year low, and real wage growth has picked up, making up from the 2021-22 inflation spike-driven erosion. With the unemployment rate at 4.1% and payrolls looking strong, there is every reason for US consumers to remain inclined to spend during the upcoming holiday season, in our view.
Additional support for consumers is in place. Fiscal policy remains supportive of the cycle, particularly from sustained increase in infrastructure spending. With the Fed beginning to cut interest rates, those in need of debt refinancing are about to get some relief.
All good stories come to an end, so how would this narrative of consumer strength get dented? The immediate risk is oil price, which is contingent on developments in the Middle East. A regional war could be damaging for global supply and push up pump prices, to which the US consumers are particularly sensitive. But oil prices, in real terms, are 60% below their all-time high, so consumers can readily absorb some upside. Besides, US oil production capacity is running at record high levels and global demand is muted. This may not be as big a spoiler as the media makes it out.
Instead, we think the risk is things get too hot, which can be thought of as a “melt-up” scenario. Helped by rate cuts, asset markets undergo a dizzying rally, consumers see that as a marker for the medium term, ending up over-extending themselves. That could inevitably lead to a sharp correction in the markets and associated collateral damage. But there are months and quarters to go before that risk becomes material.
The Fed will have to reckon with this risk soon, in our view, and may have to scale back markets’ overwhelming expectations of a major rate cut cycle. That in turn could cause a bond market tantrum. US consumers may be feeling great, but policy makers’ headaches remain.
To read the full report, click here to Download the PDF
Topic
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates & Digital Assets)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.