Uncommon truths: Black Friday blues

Black Friday has become a global phenomenon but what will it tell us about consumer spending in the US? Versus the UK, it seems that US spending has benefitted from fiscal support and falling savings rates. Those factors may have reached their limits, pointing to the risk of short-term market volatility.
In the past week I travelled to Stockholm, Oslo and Vienna and they had one depressing feature in common with London. Black Friday! Quite why this Thanksgiving related sale day (or week or month) has become one of the more successful US exports is beyond me but it has. The question is then whether it will make any difference to consumer spending patterns, other than changing the timing.
This is a particularly interesting question in the US, where consumer spending has been an important driver of the economy during the recovery from the pandemic. However, there have been signs of a slowdown, with retail sales slowing in October and Walmart warning that it had seen an easing of sales in the latter half of October. Maybe US consumers were holding back for Black Friday or perhaps the wheels are starting to fall off the US bandwagon. Early reports from US retailers about Black Friday business could give us a clue.
There is no denying the resilience of the US consumer. Figure 1 shows a comparison between US and UK real consumer spending trends so far during this century. As both series are indexed to be 100 in 2019 Q4, don’t worry about which is higher than the other. The focus should rather be on a comparison of the trends. For most of the period considered, those trends have been surprisingly alike (there had not been a tendency for the US consumer to power away from its UK counterpart). However, in the third quarter of 2023, US consumer spending was around 10% higher than in the final quarter of 2019 (the last calendar quarter before the pandemic). Meanwhile, in the UK, consumer spending was still 1.4% below the pre-pandemic level. US consumers have clearly outspent their UK counterparts over the last four years.
However, the tendency for underperformance by UK consumers started before the pandemic. In fact, it appears to have resulted from three shocks. First, Figure 1 suggests the Global Financial Crisis (GFC) was harder on UK consumers than on their US brethren. More gradual, but equally interesting, was the underperformance of UK consumer spending in the aftermath of the Brexit vote, culminating in a flatlining of UK spending during 2019 (well before the onset of the pandemic). Finally, came the pandemic shock itself, with UK consumers suffering more than US counterparts. The latter has more than recovered lost ground, while the UK consumer continues to struggle. In fact, US spending appears to be in line with what the pre-pandemic trend would have suggested, while in the UK it has broadly flatlined since mid-2018.

Note: Based on quarterly data from 2000 Q1 to 2023 Q3.
Source: LSEG Datastream and Invesco Global Market Strategy Office
Why the transatlantic gap? Figure 2 examines two factors: income and savings behaviour. Figure 2a suggests that real personal disposable income (again indexed to be 100 in 2019 Q4) was following a similar path in the two countries prior to the GFC. However, UK disposable incomes seem to have suffered more during that episode (partly due to a decline in income and partly to a rise in taxation). UK real disposable incomes then lost momentum in the aftermath of the Brexit referendum in mid-2016, perhaps due to the higher inflation that followed the weakening of sterling (and perhaps due to EU workers leaving the country).
Finally, UK real disposable incomes have flatlined since the end of 2019, while those in the US were boosted by successive tax rebates (though they have subsequently fallen back to below the pre-pandemic trend). US real personal disposable incomes in 2023 Q3 were 6.5% above where they were in 2019 Q4, while those in the UK were pretty much in line with the pre-pandemic level (by 2023 Q2). Hence, around half of the consumer spending gap between the US and UK since 2019 Q4 seems to be down to the difference in trends of real personal disposable income.
The rest of the gap is presumably down to savings behaviour. This is confirmed by Figure 2b. Savings rates jumped in both countries in the early stages of the pandemic due to the dampening effect of lockdowns on spending (and the fiscal boost to disposable incomes in the US). Savings rates then fell back as economies reopened but the decline was more marked in the US. The savings rate in the US is now further below that of the UK than usual. It was 3.8% in the US in 2023 Q3 versus an average of 5.7% since 2000 Q1. In the UK it was 9.5% in 2023 Q2 versus a century-to-date average of 8.5%.
So, two factors seem to set the US apart from the UK when it comes to consumer spending patterns over recent years: fiscal support and savings rates. The boost to US government income transfers in 2020 Q2 and 2021 Q1 both added 13%-14% to quarterly aggregate personal disposable income. That is enormous and was an important contributor to the rise in gross government debt from 108% of GDP in 2019 Q4 to 122% in 2023 Q2. That, added to the rise in bond yields, had pushed US government interest costs to 15.3% of revenues by October 2023, versus 10.7% in December 2019. That is the highest since 1997 (the peak was 18.5% in 1992) and is likely to continue rising as old debt is replaced by higher yielding new debt (the average maturity of US government debt is more than five years). It seems unlikely that the US consumer will again be offered that sort of support outside of a crisis and, even then, the state of government finances may impose limits on the extent of any such support.
Those transfers from the government contributed to the large excess savings that were accumulated by US households and that have allowed spending to outstrip income in the meantime. Put another way, it allowed spending to rise briskly while the savings rate fell.
There has historically been an inverse relationship between the savings rate and the household net worth to disposable income ratio in the US. The latter ratio hit a historical peak of 8.4 in 2022 Q1, aided by the high level of savings during the pandemic but also by the surge in asset values during 2021. That encouraged consumers to spend a larger than normal share of their income and the savings rate fell to a recent low of 2.7% in June 2022 (it did go lower in the pre-GFC years). The net worth to disposable income ratio has since fallen to 7.8 in 2023 Q2 (which is still pretty high) and the savings rate had rebounded to 5.1% in that same quarter. However, the savings rate fell again in 2023 Q3, reaching 3.4% by September, which explains the strength of consumer spending in that quarter.
I suspect that both fiscal support to incomes and falling savings rates have reached their limits. Wage growth will become the key driver of spending and that is unlikely to be spectacular in the face of rising unemployment. Despite the mirage of growth in 2023 Q3, I believe the US economy is slowing. That could still provoke risk asset volatility over the coming quarters, until the economy recovers later in 2024.
Unless stated otherwise, all data as of 26 November 2023.

Notes: Based on quarterly data from 2000 Q1 to 2023 Q3.
Source: LSEG Datastream and Invesco Global Market Strategy Office