Consumer Demand Is Regaining Momentum

Despite relatively robust performance by the U.S. economy, 2024 has been challenging for consumers as persistent cost of living concerns were exacerbated by weakening labor conditions. Morning Consult’s U.S. Consumer Health Index (CHI), which combines high-frequency consumer sentiment and employment data to create a real-time metric tracking consumer spending demand, suffered a dramatic dip during the second and third quarters of the year as consumers became increasingly fatigued by and unwilling to accept elevated price levels. 

In recent months, however, this metric has been showing signs of gathering momentum. As of the week ending November 16th, the topline CHI had recovered to its highest level since May of this year after climbing 2.6 points from its historical low registered in late July. The current level remains negative, with readings below zero historically suggestive of weaker year-on-year demand growth. However, the strong upward trajectory for the CHI is a promising sign for consumer spending heading into the home stretch of the holiday shopping season.

Spending by lower earners finally showing some recovery

In a reversal from recent trends, the lowest earning consumers boosted their spending for a second consecutive month. Adults from households earning less than $50,000 per year have had negative year-on-year spending growth in all but one month so far this year, and have largely been a drag on topline spending. Meanwhile, consumers from the highest income group - categorized as earning $100,000 or more annually in Morning Consult’s data - have offset the negative impact of their lower earning and lower spending peers with relatively stronger purchasing growth. 

Since high earning households have a larger per-capita impact on spending, their effect on aggregate spending data–like the government’s measures of retail sales and Personal Consumption Expenditures–can be larger than that of lower earning households, who have less of an economic footprint per capita.

In October, Morning Consult’s spending data showed that high earners continued their robust spending growth, with year-on-year growth of over 10%. While the lowest income group’s spending remained below their 2023 level (after adjusting for inflation), the 3-month trend for this group featured a strong rebound of 5.6% growth. Spending growth among this cohort last month was driven by a diverse range of categories such as travel, auto payments, health care and alcohol. 

Middle income group’s spending may strengthen in November

Through October, the middle-income cohort’s spending remained subdued compared to 2023 levels. But midway through November, CHI readings for each of the income groups offer an updated view suggesting this month may bring some improvement. CHI scores for adults from households earning between $50,000 and $100,000 did not fall as sharply as scores for the lowest income group this year. However, they did slip into negative territory and continued to trend flat through the end of October, even after CHI indexes for higher and lower earners began their upward trend. This trend has begun reversing: The first three weeks of readings in November all showed improvements for the middle-income group, indicating we may see this cohort join their peers in expanding purchases this month.

Spending recovery is not just about sentiment

Morning Consult’s topline index of consumer sentiment has been on an upward trajectory in recent months, and jumped even higher after the election earlier this month. Sentiment is a component of spending decisions, so rising optimism among consumers could be a driver of improving demand. However, decomposing the recent drivers of recovery in the CHI suggest that it is more than “animal spirits” underpinning improvement in buying behavior; the labor market appears to be the more significant driver in rising index scores. Looking at a 4-week moving average of net changes in CHI scores by component, the unemployment component has tended to make up a larger portion of the upward shifts compared to the sentiment component.

Furthermore, there are reasons to believe this pattern could continue, at least in the near term. The unemployment component of CHI is lagged, meaning demand conditions are responding retroactively to shifts in labor market dynamics. The index has yet to digest the most recent unemployment data tracked by Morning Consult, which has been generally positive. Additionally, the component of sentiment used in the CHI–current personal financial conditions–is part of the Current Conditions segment of the topline Index of Consumer Sentiment (ICS), which had notably less upward movement in the wake of the election. Instead, expectations for future conditions largely drove up the topline sentiment figure. Should these views on the future begin to permeate consumers’ perceptions of their current situation, real-time demand may respond even more to improving sentiment.

While the current consumer outlook appears to be on the upswing, there are plenty of risks that could derail that positive trajectory. Perhaps most significantly, inflation progress is seemingly beginning to stall. Strong buying demand from consumers is unlikely to help this issue, particularly if recently percolating signs of supply chain pressures gather steam. Policy proposals like tariffs and tax cuts by the incoming Trump administration may already be shaping expectations for potentially higher future inflation, adding upside risk. One recurrent lesson learned from the last few years is that consumers hate inflation; quickening price growth could dent sentiment and spending among consumers already primed for dissatisfaction with cost of living increases. Furthermore, stubborn inflation is also reducing the likelihood of further rate cuts  by the Federal Reserve. A more extended duration of higher rates could once again weigh on businesses’ hiring decisions, potentially undermining the employment-driven improvements observed in the CHI in recent months.

Morning Consult Intelligence customers can access the CHI data on the MCI platform. Refer to this article on how to create brand specific CHI indexes.