The backbone of the U.S. economy showing cracks

Consumers are the backbone of the U.S. economy — making up nearly two-thirds of GDP. But consumers are showing signs of slowing their spending as economic conditions worsen.

In May, U.S. retail sales fell for the first time this year, and recession odds are increasing — pressuring consumers even more.

• Layoffs: Big layoff headlines have mostly been limited to the tech sector — but we’re seeing signs of spreading into other industries, with Tesla cutting salaried staff by 10%.
• Dwindling savings: In April, the U.S. personal savings rate dropped to 4.4% — the lowest rate since 2008 — after reaching a record 33.8% during COVID.

Consumer pullback: Per Washington Post, there are signs that consumers are spending less on dining out, vacations and personal care.

In May, services spending growth slowed to its lowest level since February 2021 (Institute for Supply Management).

• June flight searches on Kayak are down 13%, and OpenTable reservations are down 11% in the week ending June 16 compared to the same week in 2019.
• Domestic flight bookings fell 2.3% in May compared to the previous month.
• Small business owners are seeing customers cancel appointments and negotiating lower prices.

Gasoline spending has also fallen in recent weeks. In the first week of June, American drivers spent 8.2% less at U.S. gas stations compared to the same week in 2021 — opting to carpool, take public transit or work from home more (WSJ).

Investors: Companies have been able to pass on higher costs by raising prices — without hurting demand. But that might not be the case anymore, and markets might not be ready for a slowdown.

Investors will likely need to brace for more short-term pain to adjust to the new reality — before markets can begin their recovery.

Dive deeper: Look for these signs before going back into the market.