Can North American consumer resilience hold in Q1?

Surprising consumer resilience became a cliché in 2023, especially when we looked at the US economy. So frequently in jobs reports, inflation data, and GDP growth numbers, the US bucked expectations of a slowdown and recession thanks to the “surprising resilience of the US consumer.” It got to the point where analysts should probably have stopped being surprised. While Canadian consumers were harder hit by rate increases than their American equivalents, they also showed periods of resilience.

Now we’re seeing the first pieces of leading data trickle in from the December holiday shopping season, which could give us an indication of where consumers are in the US and Canada. Eric Lascelles, chief economist at RBC Global Asset Management, unpacked some of what we know so far and outlined the potential risks or sources of additional resilience in US and Canadian consumers. He explained that, at least based on the first indicators, the trend of consumer resilience appears to have held through the holidays.

“The weekly Johnson Red Book retail sales metric suggests that retail sales growth looks pretty solid in the US right now through the holiday season and into early 2024,” Lascelles says. “Looking at some of the credit card data released by Bank of America and RBC and it looks somewhat unremarkable. Spending growth wasn’t spectacular, it wasn’t terrific, but it looks like it held together reasonably well into the holiday season. It was a decent holiday season for spending, but it was not a spectacular one.”

The fact that the past holiday season’s spending seems ‘unremarkable’ should be considered itself remarkable, Lascelles accepts, given the pressures that inflation and interest rate increases have put on US and Canadian consumers. The US consumer, he says, is still the leader in this environment. However, both US and Canadian consumers are notably wealthier than they were a few years ago, with wage growth at or above the annualized rate of inflation and gains in both the housing and stock markets contributing to greater overall wealth.

The picture is not completely rosy, however. Wage growth has slowed in the US and Canada, and unemployment has ticked up in both countries — though more meaningfully in Canada. Savings rates have declined away from their 7 per cent “normal” rate, after spiking up during the first years of the pandemic, savings rates in the US and Canada are now lower than that desired level. The cost of debt servicing is rising in Canada and the US, American student loan payments have resumed, and levels of both household debt and credit card defaults are rising.

Lascelles believes that the course US and Canadian consumers end up on, whether they buck these mounting pressures again or finally capitulate, may indicate whether Canada and/or the US enter recessions this year and for how long. He is budgeting for consumer spending to slow, at least in Canada, which may indicate a recession. Consumer spending seems to have propped up the Canadian and US economies so far, and a significant drop may indicate a more meaningful downturn.

Employment and wage growth numbers may tell us more about how consumers will behave in Q1. If we see meaningful jobs losses, that could indicate a real recession in either country. However, Lascelles notes that despite slight upticks in unemployment both the US and Canada are at near historically low unemployment rates and are still posting wage growth numbers.

As more data comes out about holiday spending in Q4 of last year and consumer confidence in Q1 of 2024, Lascelles is looking closely at a number of variables. Employment data is key, as is wage growth. Beyond that, the course of the interest rate story this year may be a determining factor. With expectations of cuts later this year, whether we really get cuts, when we get them, and how steep they are could shift the nature of consumption and with it both the US and Canadian economies.

“If we then stumble our way into recession, which isn't a certainty, but we think is incrementally more likely than not at this point for 2024,” Lascelles says. “That's where you tend to see bigger job losses. And that's where consumers recoil. And again, it could come in either way. It could be consumers get a little nervous, and they spend less, and that causes the job losses, or it could be, you know, businesses get nervous and do some precautionary laying off. And that causes it it's hard to say, in the end, it becomes a vicious circle. That's what recessions are.”