Americans hate this economy, but they keep spending like they love it.
The Commerce Department reported Friday that consumer spending rose 0.6% in August. Although that may not sound like a lot, it represented significantly stronger growth than economists had expected.
The report wasn’t an outlier: Retail sales also rose 0.6% in August, the Commerce Department said in a separate report two weeks ago. Corporate earnings and sales have proven resilient in the past quarter, with many companies saying customers continue to give them business despite concerns about a flagging economy. And a revised report issued Thursday on the second-quarter gross domestic product, the broadest measure of US economic growth, showed that GDP grew by the fastest rate in almost two years, buoyed by strong consumer spending.
Still, this economy’s ratings are in the toilet. The University of Michigan reported Friday that consumer sentiment fell to an index level of 55.1, the seventh-lowest reading dating back to 1952. That’s unsurprising considering prices keep creeping higher, giving Americans PTSD from the post-pandemic inflation crisis that sent prices soaring during the middle of former President Joe Biden’s term.
Americans consistently rate the economy as the most important issue for the country, according to CNN polling conducted by SSRS. And as prices keep rising – the annual inflation rate rose to 2.9% in August, the highest since January, according to Bureau of Labor Statistics data released earlier this month – their opinion about the economy is sinking fast.
Not helping: President Donald Trump’s tariffs. Despite polling showing tariffs are his lowest-rated issue – by far – Trump continues to double down on his extraordinary trade policy. On Thursday, Trump announced new tariffs on drugs, furniture, trucks and cabinets. And he promised more are on the way. Recent consumer price reports have shown that his tariffs are in part to blame for inflation’s slow but steady rebound.
Also not helping: Hiring has come to a standstill. America actually lost jobs in June, the first time that happened in any month since December 2020.
And yet, America’s economy keeps humming along. The Atlanta Fed’s GDPNow tool predicts that the US economy will expand at an annual rate near 4% this quarter, which ends Tuesday – a stunning achievement considering the toxic mix of slow hiring, rising prices, high interest rates and lackluster consumer sentiment.
How can the economy get such terrible grades even as it’s growing at such a strong pace?
Part of the answer is “vibes,” that oft-used and nebulous term that was used to describe similar consumer behavior during the recent inflation crisis. Despite record-low consumer sentiment (just below today’s moribund levels), people kept spending their way through 2022 and 2023 like it was nothing. Jobs were plentiful. People still had plenty of pandemic-era savings stored up. So they dialed back on discretionary purchases (everyone already fixed up their home and bought a treadmill during the pandemic, anyway), but they kept buying the stuff they needed.
That’s why the term “vibecession” became a go-to for economists during the Biden years: The economy felt like it stunk, but it actually was doing just fine.
There are elements of that this time around. The economic data may be headed in the wrong direction, but it’s still relatively strong. Inflation is rising, but it’s gaining quite slowly and is nowhere near the 9.1% annual rate from 2022 – a four-decade high. Job growth is slowing, but it’s still growing, and unemployment remains historically low. And many Americans still have pandemic-era ultra-low mortgage rates to help them weather price increases.
“Downbeat sentiment stands in stark contrast to encouraging hard data,” said Oren Klachkin, economist at Nationwide Financial Markets. “Even though they feel negative, consumers continue to spend. We put more stock in the hard than soft data.”
Another reason for bad grades in a good economy: Wealthier Americans are doing just fine, while people with fewer means are struggling. Economists call it a “K-shaped” economy.
Federal Reserve Chair Jerome Powell earlier this month commented on that phenomenon and why the bifurcation can help the economy in aggregate, even if many people are struggling.
“Consumer spending numbers were well above expectations, and that may well be skewed toward higher earning consumers. There’s a lot of anecdotal evidence to suggest that,” Powell said. “Nonetheless, it’s spending. So I think the economy is moving along.”
Regardless of the reasons, the fact that consumers are still willing to spend is undoubtedly good news: America’s GDP is more than two-thirds comprised of consumer spending. As long as people keep shelling out, America’s massive and diverse economy will keep running just fine.
Of course, recessions happen sometimes. And there are plenty of warning signs coming from all parts of the US economy.
Hiring has been in a yearlong slump, and monthly job gains recently fell below the amount needed to keep up with America’s population gain. The Black unemployment rate has surged in recent months – often a precursor to more broad-based layoffs. If job growth turns into job losses, America’s economy could turn on a dime.
A looming government shutdown threatens to upset the economic balance as well – particularly if the Trump administration makes good on its threat to permanently eliminate thousands of government jobs that would be furloughed.
There is some reason to suspect that spending may have been artificially boosted in recent months. For example, August is a back-to-school month, when many people have little choice but to spend. The next few months could get ugly if consumer sentiment continues to slump and Americans opt to rein in their spending.
“Consumers are becoming less uncertain about the path of future inflation, but many expect higher prices,” said Klachkin. “Alongside slower income growth and high prices and interest rates, this should contribute to a moderation in consumer spending growth.”
Many Americans are shelling out on their credit cards and buy-now-pay-later loans, which carry astronomical interest rates. Credit scores last year fell at the fastest pace since the Great Recession as the cost of living rose and long-paused student debt payments restarted.
Meanwhile, stocks continue to surge to record highs, giving investors a strong sense of invincibility. But stocks are at another record high: their relative price compared to companies’ sales and profit expectations. That suggests the market has gotten seriously expensive and may be in an AI-induced bubble that could be close to bursting.
Tariffs continue to pose a threat to the economy, too. Despite relatively low inflation after Trump imposed historic tariffs, businesses may soon need to pass along more of their added costs to consumers.
Recent producer prices reports show that wholesalers are absorbing much of the tariff costs, but their profit margins are getting significantly squeezed. Citi economist Nathan Sheets estimated that consumers have borne only about 30% to 40% of the cost of tariffs, and that balance could soon shift as company shareholders demand profit growth.
