Why – and Where - Consumers Keep Spending

Consumers stay strong, but their focus keeps shifting, Russ explains.

In the second-quarter, real household spending fell at an annualized rate of 33%. Going back more than 70 years, this was the single worst quarter on record. However, the rebound has been equally dramatic and unprecedented. As unlikely as it seemed back in the spring, in aggregate U.S. households are in surprisingly good shape and continue to spend, and in some cases even splurge.

When I last discussed the consumer back in late September, I suggested consumption would continue to rise given a strengthening labor market, solid household balance sheets and a rebound in housing. Today I would double-down on each of those themes, with an emphasis on spending (and stocks) tied to housing. A few updates:

Job growth and income continue to rise. While job growth has slowed, the U.S. still added an average of 500k net new jobs during the past three months. And despite the expiration of several stimulus programs, adjusted for inflation U.S. personal income is growing at 5%.

Unlike in 2009, household balance sheets are solid. Debt-to-disposable income is at its lowest point since the late 1990s and consumers continue to save. At 13.6% the savings rate is 6 percentage points above pre-pandemic levels and more than twice the 20-year average.

Housing boom likely to continue. One way this recession (and recovery) has differed from previous ones has been the resilience of durable goods. In part, this reflects the unique nature of the recession and the extent to which other types of spending -- i.e. travel or dining -- have been constrained. This trend is evident in remarkably resilient auto sales and even more so in the housing market (see Chart 1). Nor is the strength limited to just home builders. As is typically the case, strength in housing supports related categories, such as home improvement and home entertainment.

U.S. homebuilder confidence

Spending chart

Source: Refinitiv DataStream, chart by BlackRock Investment Institute, using data from National Association of Home Builders, Census Bureau. December 10, 2020.