Our investment teams explain why buoyant US consumer spending will have to weaken eventually. That could pose problems for debt-laden consumer-facing companies.

Read this article to understand:

  • Why a potential consumer spending slowdown is a key theme for credit portfolio positioning
  • Why buoyant headline numbers could be masking signs of stress
  • Why investors should keep an eye on consumer-facing companies’ debt

For the past two years, the US economy has held up far better than many expected, with soaring energy prices and a sharp rise in interest rates not inflicting the kind of damage that seemed likely. This has been largely down to the strength of consumer spending.

Accounting for around two thirds of the economy, it has been surprisingly strong since the start of 2022. That is primarily explained by a buoyant labour market, where record employment has fuelled rapid earnings growth.

But record savings amassed during the pandemic have also played an important role. According to the Federal Reserve, US households saved about $2.3 trillion more in 2020 and through the summer of 2021 than they would have done if income and spending had grown at pre-pandemic rates.1 Unprecedented government transfers in 2020 and a moratorium on student loan repayments boosted incomes at a time when consumers’ ability to spend was severely constrained by social distancing.

However, the Fed estimates a rapid drawdown meant excess savings built up during the pandemic and its immediate aftermath were likely to be exhausted by the end of the year.2 Indeed, all but the richest 20 per cent of Americans appear to have already spent them.

Figure 1: US excess savings depleted for bottom 80 per cent of households (per cent)

US excess savings

Source: Bloomberg, September 25, 2023.3

“Consumer spending has been solid since the start of 2022. The question is: how much staying power does it have with the tailwind from excess savings largely behind us and increasing headwinds from stubborn inflation, tighter credit conditions and potentially a slowing labour market?,” says Michael Grady, head of investment strategy and chief economist at Aviva Investors.

Average household income has increased by 15 per cent since 2019. In that period, food prices have risen by around 25 per cent and petrol by 37 per cent. Together, food and petrol account for 18 per cent of Americans’ disposable income. This number jumps to 25 per cent when the top 20 per cent of earners are excluded.4

Turning to debt

As a result, many Americans, especially the less well off, are increasingly turning to debt to fund purchases. Outstanding credit card balances rose $45 billion, or 4.6 per cent, in the second quarter to a record $1.03 trillion. With US interest rates at their highest levels since early 2001, borrowing costs have pushed credit card delinquencies to an 11-year high.5

Auto loans paint a similar picture, with borrowers falling behind on payments at the highest rate on record. According to ratings agency Fitch, 6.1 per cent of US subprime borrowers – those with the lowest credit scores – were 60 days or more behind on their payments as of September, a record high in data going back to 1994.6

Higher interest rates mean debt payments were already eating into household budgets, as shown in Figure 2. The fact 40 million Americans resumed interest payments on student loans in October will add to the burden. Grady estimates this will cut disposable annual incomes by roughly a further $70 billion, or around 0.3 per cent.

Figure 2: Household debt payments as a share of disposable income (per cent)

Source: Aviva Investors, Federal Reserve Bank of St Louis. Data as of November 3, 2023.7

US households spent 9.8 per cent of their disposable income on repaying debt in the second quarter, up from 8.3 per cent in the first quarter of 2021. However, since many homeowners locked in low mortgage rates prior to them rising, this was well below the peak reached in 2007, according to Fed data.8

For now, economic data points to consumption continuing to hold up well. The US economy expanded at a 4.9 per cent annualised clip in the third quarter, the strongest rate of growth in almost two years. Consumer spending rose at an annualised pace of four per cent, up from just 0.8 per cent in the second quarter, with solid growth across both goods and service sectors.9

Labour market holds the key

“A consumer recession is highly unlikely without a marked deterioration in the labour market. Then again, that would point to interest rates staying elevated for the foreseeable future. Consumption, which will have to weaken eventually, is unlikely to be anywhere near as supportive of growth over the coming year,” says Grady.

That could spell trouble for companies operating in the retail, dining, entertainment and travel sectors, some of which have already begun to warn Americans are no longer splashing out with the same gusto.

Food and beverage firms have for some time been warning consumers were trading down

Food and beverage firms have for some time been warning consumers were trading down, in some cases by shifting away from premium products and in others by favouring private-label, or own-brand, products.

French groups LVMH and Pernod Ricard recently warned weaker US sales of premium alcoholic drinks were hitting profits. LVMH reported on October 10 that revenues from wine and spirits fell ten per cent in the first nine months of the year, amid a big drop in US cognac sales.10 Days later, Pernod Ricard warned the latest quarter had got off to a “soft start” following revenue declines in the US.11

Mary Gresla, a Chicago-based credit analyst at Aviva Investors, noted both PepsiCo and Amazon had also recently warned consumers were increasingly price conscious, although by contrast Keurig Dr Pepper said it had seen little evidence of consumers trading down.

She is looking for signs of weaker earnings in the restaurant industry as diners switch progressively from high-end establishments to more casual restaurants and ultimately fast-food outlets. A portion of restaurant spending is also likely shift to grocery stores as households opt to cook more at home.

“Across retail, but especially in more discretionary areas, we see a danger that profit margins come under pressure as companies increasingly rely on promotions and discounts to drive traffic,” Gresla says.

Signs of caution

There are some signs consumers may be growing cautious when it comes to purchasing bigger ticket items. For instance, Whirlpool, the home-appliance maker, said in September demand for its products had been even softer than anticipated due to increased mortgage rates and low consumer confidence. That had led it to step up promotions.12

Harsharan Mann, a global equities research analyst focused on the consumer sector, likewise senses a growing number of consumer-focused companies are getting more cautious on the outlook, notwithstanding the strong headline consumer spending numbers.

Luxury goods companies have been talking of a US consumer slowdown for a year

“Luxury goods companies have been talking of a US consumer slowdown for a year. You’re now seeing other subcategories, such as beauty products, being affected. Although the beauty category itself has been strong, consumers are getting more selective,” she says.

Adan Jimenez, Chicago-based credit analyst at Aviva Investors, says the risk consumer spending slows faster than is priced in by markets is one of the most important themes driving credit portfolio positioning. He is bearish on several consumer-facing sectors, in particular casinos.

“We’ve got a negative view of the gaming industry in 2024. Once savings have been exhausted, there will be less trips to Las Vegas and regional casinos. This is not currently reflected in debt prices,” he says.

Boyd Gaming, which operates 28 casinos in ten US states, warned on October 24 that third-quarter revenues from retail customers not part of its loyalty programme had declined four per cent.13

“Quarterly results were impacted by declines in play from our retail customers and ongoing cost pressures, both related to the challenging economic environment,” said chief executive Keith Smith in a statement accompanying the firm’s third-quarter results. The company’s stock plunged ten per cent.

“If regional casinos like Boyd are hurting, Vegas and other premium destinations will hurt more. These businesses have high fixed costs, so a decline in revenues means an outsized hit to earnings,” says Jimenez.

Housebuilder earnings forecasts appear too high given likely downward pressure on prices

He is also cautious on debt issued by housebuilders. While strong balance sheets should enable the sector to withstand all but the most serious of economic downturns, earnings forecasts appear too high given likely downward pressure on prices.

Housebuilder Taylor Morrison warned on October 25 that high mortgage rates are making new homes unaffordable for an increasing number of Americans.14

“The sharp spike in interest rates over the last two months has once again pushed affordability to unsustainable levels for many buyers, especially at the entry-level, and is weighing on buyer confidence and urgency even among some with the financial ability to move forward,” it said.

Refinancing worries

Jimenez believes consumer spending will slow meaningfully. Should interest rates stay elevated for a lengthy period, that could prove especially problematic for highly leveraged firms needing to refinance debt in the coming months.

As for Gresla, she says: “Highly leveraged issuers, particularly in discretionary categories, with near-term maturities are most at risk of default. Their ability to refinance at a reasonable rate is limited by an uncertain consumer outlook and their debt is likely to be volatile.”

With the yield on some retailers’ debt having already risen sharply, pockets of value are emerging

Having said that, she acknowledges that with the yield on some retailers’ debt having already risen sharply, pockets of value are emerging.

“Investors need to be selective. Certain lower-rated, highly leveraged issuers without near-term funding pressures look attractive. Yield spreads relative to US Treasuries have widened as investors have favoured higher-quality debt. Some of these firms still have time to strengthen their positions before they need to refinance,” she explains.

Jimenez, meanwhile, believes debt issued by some cruise companies looks relatively attractive, even though he is more cautious than many of his industry peers on the prospects for US consumer spending,

“While many operators have high leverage, pent-up demand following the pandemic, relative affordability compared to land-based alternatives and improving cashflow as fleet investments are completed should offer some support to debt prices,” he says.

Like her credit colleagues, Mann is heavily focused on the strength of companies’ balance sheets and ability to refinance maturing debt.

“We generally avoid highly leveraged companies. But in the current rate environment, it’s forefront in your mind. A company might look interesting, but if it’s highly leveraged, it makes you question whether it could be in a stressed position if rates stay higher for longer, which is the prevailing view,” she says.

Investors need to be alert for any warning signs of a US consumer recession

While Mann sees little sign of a US consumer recession in the near future, investors need to be alert for any warning signs. If US consumer spending does not start to contract, investors may look selectively at more discretionary sectors which have underperformed over the past two years, especially as high interest rates do not favour consumer staples companies, which tend to pay higher dividends.

“But conversely, in a significantly worsening environment, you would probably want to stick to safe staples companies as the consumer is going to cut back on that extra piece of clothing rather than a meal,” she says.


  1. Aditya Aladangady, et al., “Excess savings during the COVID-19 pandemic”, Federal Reserve, October 21, 2022.
  2. Francois M. de Soyres, et al., “Accumulated savings during the pandemic: An international comparison with historical perspective”, Federal Reserve, June 23, 2023.
  3. Alexandre Tanzi, “Only richest 20% of Americans still have excess pandemic savings”, Bloomberg, September 25, 2023.
  4. Aviva Investors’ calculations.
  5. “Household debt and credit report (Q3 2023)”, Federal Reserve Bank of New York, August 2023.
  6. Subprime auto ABS performance deterioration likely with downturn”, Fitch Ratings, August 23, 2023.
  7. “Household debt service payments as a percent of disposable personal income, percent, quarterly, seasonally adjusted”, Federal Reserve Bank of St. Louis, November 3, 2023.
  8. “Household debt service and financial obligations ratios”, The Federal Reserve Board, September 21, 2023.
  9. Nicholas Megaw and Kate Duguid, “US economic growth accelerated to 4.9 per cent in third quarter”, Financial Times, October 26, 2023.
  10. “LVMH hit by growth slowdown as demand for high-end drinks falls”, Business Matters, October 11, 2023.
  11. Karen Peattie, “Glenlivet owner Pernod Ricard reveals ‘soft start’ to year”, The Herald, October 20, 2023.
  12. “Whirlpool announces third quarter results; Europe transaction clears major milestone; operational priorities on track and delivering substantial cost take out”, Whirlpool, October 25, 2023.
  13. “Q3 2023 report: Boyd Gaming reports third-quarter 2023 results”, Boyd, September 30, 2023.
  14. “Taylor Morrison reports third quarter 2023 results”, Taylor Morrison, October 25, 2023.

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