Joseph Amato, Chief Investment Officer at Neuberger Berman, has outlined the state of the US consumer - a key driver of both US and global economic growth.

Amid changing policy dynamics, fluctuating markets and swings in sentiment, the US consumer has, so far, remained surprisingly resilient.

The consumer serves as a central pillar of the US economy representing about two-thirds of GDP, both in total and as a portion of economic growth last year. As a result, reading the tea leaves around consumer sentiment and behaviour are essential to assessing growth prospects – especially given the turbulence seen over the last several months.

Indeed, investors have been treated to a host of policy moves that have caused disruption to corporate outlooks and markets. Chief among them is the US tariff regime, which to a large extent remains on pause through at least July as the US works through negotiations and awaits resolution of last week’s trade court decision disallowing the tariffs. Besides trade, the Republican tax bill has been a source of both optimism on growth and worries over deficit spending.

Amid all this uncertainty, US consumers have generally shown increased wariness in spending patterns and overall confidence levels – aside from a tariff-pause-driven higher reading in May – but remain surprisingly healthy from a fundamental perspective, supported by still-elevated cash holdings and a solid labour market. According to JP Morgan, the “consumer cash pile,” including a combination of checking, savings and consumer money market funds, set a new record of $21.6tn in Q424, up from $14.8tn five years earlier. The April jobs report was unexpectedly strong at 177,000 positions created, while the unemployment rate held steady at 4.2%.

This may prove to be the calm before the tariff storm, but, for now, the consumer is hanging in there. Such resiliency is one of the primary reasons that the US economy has outperformed many other regions of the globe. And access to that US consumer is why – assuming reversal of the trade court decision or the development of a new legal rationale for tariffs – the Trump administration could end up extracting some trade concessions in its upcoming negotiations.

On the ground

The strength of the consumer, coupled with caution around purchase choices, was on display in the latest earning season across a range of economic sectors.

Retail: a mixed bag

Prevailing sentiment among retail executives, analysts and investors is that the consumer’s resilience is persisting. However, while the data surprised positively following winter’s softness, a dose of caution may be warranted. Factors such as pulled-forward demand ahead of tariff impact and deferred demand (cold/flu season, weather, tax refund timing and Easter timing) may have “flattered” the spring’s inflection. Moreover, a touch of complacency may exist given that most tariffs have yet to really touch consumers. Positive demand reads from purported bellwethers like Walmart and Home Depot may be poor proxies for consumers’ spending appetite, given the presence of essentials in their sales mix and their benefiting from consumer belt-tightening, as well as depressed expectations. In contrast, discretionary retail saw general softness, with Target, for example, suffering from tariff worries (along with a consumer boycott).

Ultimately, whether nominal retail sales grow 2% or 6% in a few months depends more on consumers’ propensity to spend than their ability to spend, hinging on amorphous factors such as sentiment, trade developments, geopolitics and other “unknown unknowns.”

Consumer discretionary: leaning into choice

Although there has been considerable noise around consumer demand in the sector, the bottom line is that higher- and middle-income consumers have money to spend, but are being choosier about how to spend it, engaging in small pleasures and delaying bigger-ticket decisions. These consumers show up when companies offer good value, a unique experience or product innovation; otherwise, they may hibernate at home with their gadgets. So long as jobs remain, it is expected that this choiceful paradigm to continue. Those in the lower-income echelons are more cautious.

Drilling down, restaurants, which tend to quickly reflect changes in sentiment, are showing stable spending in aggregate, but also clear winners and losers around value and innovation. Travel volume, in contrast, has slowed, particularly among airlines, as travellers postpone booking their trips. Leisure travel slipped in the first few months of the year and dropped markedly in April amid tariff news but later saw a rebound while remaining on fragile footing. As Hilton CEO Chris Nassetta noted in an earnings call, “travellers are largely in a wait-and-see mode as the rapidly changing macro environment continues to unfold… My own belief is you will see some of that… uncertainty wane over the next couple of quarters.”

Consumer staples: caution is affecting buying trends

Recent earnings calls from leading consumer packaged goods companies indicate that the US consumer is navigating this period of economic uncertainty with more cautious spending and shifting purchasing behaviours. Management teams consistently highlighted slowing growth, increased price sensitivity and a tendency for consumers to trade down within product portfolios. While some companies noted resilience in certain essentials, the overall tone was one of caution, with particular attention to softening volume trends and a focus on value. For example, Procter & Gamble noted that its US category sales growth rate slowed from 3% over the trailing 12 months to close to 1% in February and March.

Actions speak louder than words

Stepping back, as long as the consumer hangs in there, backed by healthy employment, the potential for recession remains low. That said, the picture is mixed across sectors and industries, and we have not seen the full impact of tariffs. Based on preliminary federal revenue data, the effective level of US tariffs was about 4.5% in April and 6.5% in May, but if enacted as proposed could eventually double or triple those figures. The question is whether wavering sentiment will eventually translate into more meaningful action, in the form of a sustained pullback in consumer spending.

 

By Joseph Amato, Chief Investment Officer at Neuberger Berman