Household Income Growth Slowing, Posing Risks for Consumer Spending
Introduction
The post-COVID-19 economic resurgence is facing a challenge as household income growth decelerates. This trend, exacerbated by persistent inflation, poses risks to consumer spending and the broader economy.
Declining Income Growth
The average hourly pay growth for January 2025 stood at 4%, marking a slowdown from the approximately 6% annual increase witnessed in early 2022. Moody’s Analytics predicts further moderation to 3.7% this year and 2% by 2028. Other income sources, such as corporate profits, dividend payouts, and bank interest payments, are also showing signs of waning.
Impact of Inflation
Inflation, while easing from its 40-year high of 9.1% in mid-2022, remains elevated at 3% in recent months. This has eroded consumers’ purchasing power, offsetting the gains made in nominal income.
Consumer Sentiment and Spending
Surveys indicate that the majority of Americans believe their income is falling behind inflation. This perception has led to a slowdown in consumer spending, with household outlays projected to grow less than 2% annually through 2028, according to Moody’s.
Consequences for the Economy
The slowdown in income growth and consumer spending could have ripple effects on the broader economy. Moody’s forecasts a slowdown in economic growth from 2.8% in 2024 to 2.3% in 2025, with further deceleration in the subsequent three years.
Layoffs and Job Market
The Trump administration’s projected layoffs of hundreds of thousands of federal workers are expected to further depress the job market, reducing hiring and wage growth. Individuals like Randy Price, who has experienced modest wage gains in recent years, fear for their job security and plan to reduce spending.
Declining Interest Income
As inflation eases, the Federal Reserve has cut interest rates, which has adversely impacted savers and seniors who rely on interest income from bank accounts. Bank savings rates have dropped from over 5% in 2023 to approximately 4.5%, further limiting income growth.
Diminishing Corporate Profits
Elevated labor costs and the cooling economy are squeezing corporate profits. This, in turn, is impacting dividend payouts, which have been flat since late 2023, and rental income.
Stock Market and Consumer Spending
The frothy stock market has provided a wealth effect that has encouraged spending. However, if stock prices begin to decline, this effect could fade, leading to further moderation in consumer spending.
Outlook
The slowdown in income growth presents risks to the economy, but it is also important to note that the U.S. has defied expectations since the pandemic. However, Moody’s warns that a global trade war that hammers corporate profits could have a significant negative impact on consumer spending and economic growth.
