With the household savings rate now below 4.5% of disposable income, consumption dynamics in the US now seem increasingly dependent on the health of the labour market. The excess savings built up during the covid period have been largely exhausted. Against this backdrop, it is hardly surprising that over the past 12 months there has been a significant fall in the confidence of households in the lowest income brackets. These households have been hard hit by soaring prices, particularly for rents and food, as well as by rising interest rates. The sharp rise in credit card defaults, to their highest level since 2010, illustrates the growing difficulties faced by this most vulnerable segment of households.

So is the solid consumer momentum seen in recent years across the Atlantic--with average annualised quarterly growth of close to 3% over the past 24 months--finally set to slow? It is too early to say.

The dominant role of affluent households in consumption

It is important to remember that in the United States, the 20% of consumers with the highest incomes contribute around 40% of total consumer spending. These consumers currently benefit from favourable financial conditions, thanks in particular to a significant wealth effect linked to the recent surge in equity markets and the rise in property prices.

In addition, the latest statistics from the employment market are still broadly satisfactory, ensuring continued growth in purchasing power. In the last quarter of 2024, income from the labour market rose at an annualised rate of 5.9%, the strongest increase recorded since the third quarter of 2023. Finally, the tax cuts promised by the Trump administration (tax on overtime, etc.) should also support the American consumer.

Upward pressure on rates

The prospect of an economic policy favourable to nominal growth--against a backdrop of very deteriorated public finances--is putting upward pressure on sovereign yields. The US 10-year yield (4.80%) has risen by around 70 basis points over the last three months, approaching the 5% threshold. While the scale of the upward movement is similar to that seen in 2016 when Donald Trump first won the election, the level of yields is much higher today. The markets are anticipating greater caution on the part of the Federal Reserve: only one rate cut, postponed in September, is now expected this year. This caution on the part of the monetary authorities is boosting the dollar, which has just hit a two-year high against the major currencies of the developed world.

This upward spiral in yields will very probably weaken the most cyclical activities, such as property (the fixed rate for a 30-year mortgage is now over 7%). On the markets, the equity risk premium, particularly in the United States, is contracting rapidly. Is renewed volatility in the cards?

Damien Petit is head of private banking at Banque de Luxembourg.

This article was originally published in .