Despite Monday’s turmoil, the American consumer is still powering the U.S. economy

Turmoil in global markets sent Americans’ stocks and investments tanking Monday and raised fresh fears of recession. But the waters calmed Tuesday, and the message from economists and Wall Street analysts is that the U.S. economy is going strong – in large part because people keep buying stuff.

American households have endured plenty over the past few years: soaring inflation, steep interest rates and other shocks such as high gas prices. And they have pulled back a little, opting for cheaper options on groceries, cars and a slew of other swappable items. That is especially the case for lower-income Americans with fewer options to scale down, fall back on savings or adjust their budgets.

Consumer spending – which makes up roughly 70 percent of the country’s gross domestic product, a measure of the size of the overall economy – has stayed solid through it all. But the perpetual fear among economists and policymakers is that the spigot will turn off at some point, and that a recent pileup of less-than-desirable data points suggest early signs of trouble.

“If I were to weigh all of the data points, I would say I have more evidence that there’s a soft landing, that the consumer isn’t rolling over,” said Mark Mahaney, senior managing director at Evercore ISI.

The markets, too, reentered the green on Tuesday, with the Dow Jones Industrial Average closing up 0.76 percent and the Nasdaq composite index and the S&P 500 both up more than 1 percent.

Analysts and officials emphasize that businesses, households and the economy overall have remained remarkably resilient in the face of high interest rates and high inflation. Consumer spending is a crucial piece of that puzzle, keeping everything from restaurants to hotels to concert venues afloat – and encouraging more hiring.

Zoom out, and the economy is still churning. It grew more than expected in the second quarter, and wages are outpacing inflation. Retail sales also were solid in June. That month, online store sales rose almost 2 percent over the previous month, and sales at food and drink establishments grew slightly. Spending on gas fell, but economists expect that is because cheaper gas freed up cash for people to spend on other things.

What seems clear for now, at least, is a split screen: robust spending driven by wealthier Americans with room to splurge and keep up normal spending habits, vs. growing cracks where businesses and households can’t keep up. Data from the Federal Reserve Bank of New York showed total household debt increased by 1.1 percent – or $184 billion – in the first quarter. On an annual basis, nearly 9 percent of credit card balances and almost 8 percent of auto loans transitioned into delinquency. The unemployment rate, which has been increasing recently, shot up to 4.3 percent in July, the highest since 2021.

Businesses with a front-row seat to consumer behavior say they are seeing that division in real time.

In May, for example, Walmart executives said many consumers’ pocketbooks were still stretched, with people spending more of their paychecks on the essentials. Meanwhile, the company saw growth among “high-end consumers.”

Over the past few months, Aldi and other grocers have boasted a large wave of price cuts. That extends to basic pantry staples and seasonal treats: Target’s summer deals extended to $1 pool noodles, $5 pool floats and $15 coolers, according to a May earnings call.

Those deals weren’t spurred by consumers pulling back altogether. But they do shed light on the small behaviors that can quickly add up to something larger.

“In the U.S., there is clearly a consumer that is more challenged, and it’s a consumer that is telling us that in particular parts of our portfolio, they want more value to stay with our brands,” PepsiCo CEO Ramon Laguarta said on a July earnings call. “That is not for all the consumers. It’s some consumers. That is not for all the portfolio. It’s some parts of the portfolio.”

One of the many open questions is how the Federal Reserve responds to this latest wave of economic bumpiness. The Fed doesn’t react to individual data points and says it needs time to understand where the economy is headed. But it has been wrong before, and is now facing a torrent of criticism that it is falling behind yet again, putting households and businesses in jeopardy.

Economists and the markets had been expecting a long–awaited rate cut at the Fed’s next meeting in September. But major firms such as Goldman Sachs now also forecast cuts in November and December; in other words, at every Fed meeting until the end of the year.

There is also fresh debate over whether the Fed will cut by larger increments, say a half–point vs. a more traditional quarter–point in September. The Fed would make a larger move only if it was sufficiently worried about a downturn and needed to catch up.

On the flip side, such a bold move would offer more immediate relief, especially for lower–wage Americans feeling the sting of high credit rates. It would make it easier to buy a house or a car, and it would free businesses up to borrow if they were looking to expand.

“We should never judge just one months’ data,” said Constance Hunter, senior adviser at MacroPolicy Perspectives. “With that said, there are multiple signals there’s softness in the labor market.”

Hunter added: “If you’re trying to buy any kind of financed good, that 50-basis point cut makes a huge difference.”