Wells Fargo Forecasts Cooling U.S. Economy in 2024, Warning of Consumer Spending Slowdown

Key Points:

• Wells Fargo predicts a slowdown in retail spending due to a weakening job market and potential layoffs.


• Despite inflation and rate hikes, consumer spending fueled 2023 economic growth.


• Households tap into savings and rely on credit to maintain spending levels.


• U.S. household debt hits record high of $17.3 trillion in Q3 2023.


• Holiday sales surge in December, but economists question sustainability.


• Consumer-product companies likely to remain cautious amid economic slowdown.


• Elevated inflation continues to burden households with higher living costs.

Consumer Spending: A Cooling Trend

Wells Fargo’s senior global market strategist, Scott Wren, anticipates a moderation in retail spending throughout 2024 as the job market weakens and layoffs become more prevalent. Wren emphasizes the strong correlation between job security and consumer spending, noting that employed individuals with disposable income tend to spend more. However, as the economy slows in the middle of the year and the labor market weakens, he believes the robust holiday spending of 2023 was likely a temporary surge rather than a sustainable trend.

Consumer Spending Drives Economic Growth

Consumer spending played a pivotal role in driving economic growth in 2023, defying challenges posed by inflation and interest rate increases. A government report revealed a 3.3% growth in the economy during the fourth quarter, largely attributed to robust consumer spending. However, the report also indicated that households were depleting their cash reserves. Personal savings declined from $851.2 billion in Q3 to $818.9 billion at the end of the year, and the personal savings rate fell to 4%.

Unsustainable Savings and Borrowing

Experts express concerns about the sustainability of consumer spending levels as savings and borrowing have finite limits. Mike Reynolds, vice president of investment strategy at Glenmede, observes that consumers increasingly rely on savings and borrowing to sustain their spending. He cautions that this trend cannot continue indefinitely, as both savings and lending are finite resources.

Record-High Household Debt

Data from the Federal Reserve Bank of New York reveals that U.S. household debt reached a record high of $17.3 trillion at the end of Q3 2023. This includes a staggering $1.08 trillion in credit card debt, the highest level recorded since 2003. Additionally, a separate report suggests that Americans ramped up their spending during the holiday season, but did so by accumulating debt. Retail sales rose by 0.6% in December, exceeding expectations.

Cautious Outlook for Consumer-Product Companies

Despite the surge in holiday sales, Wren remains skeptical about the continuation of strong spending throughout the year. He anticipates a noticeable economic slowdown in the middle of the year and believes consumer-product companies will maintain a cautious approach.

Price Tag Fatigue

In addition to relying on credit cards, consumers are also facing price tag fatigue. While inflation has decreased from its peak of 9.1% in June 2022, it remains significantly higher than the Federal Reserve’s 2% target. Moreover, compared to January 2021, prices have increased by a substantial 17.6%.

Inflationary Pressures

Elevated inflation has created significant financial burdens for U.S. households, particularly those with low incomes. Basic necessities like food and rent have become more expensive, straining already-stretched paychecks. Food prices have risen by 33.7% since early 2021, shelter costs have increased by 18.7%, and energy prices have surged by 32.8%. The disproportionate impact falls on low-income Americans, whose limited resources are heavily affected by price fluctuations.

Call to Action

As consumers navigate the evolving economic landscape, it’s crucial to stay informed about spending trends and make informed financial decisions. By monitoring market conditions, adjusting budgets, and seeking professional advice when necessary, individuals can weather the economic slowdown and position themselves for long-term financial success.