US consumers strong but uneven
Aggregate consumer finances continue to look good amid record wealth. But lower income consumers are experiencing growing stress; any labor market deterioration would rapidly exacerbate those vulnerabilities.
Weekly highlights
But headline was 3.8% YoY
Ex-Covid, lowest since 2008
Up 19.1% YoY
Underlying momentum remains weak.
Driven by stronger spending on financial services and food.
The fifth straight quarterly decline
Blockbuster
Below expectations
Downbeat headline
US: K-shaped to the max!
The phenomenon of divergent performance across consumer segments (the so-called “K-shaped economy”) is intensifying.
Aggregate data on consumer finances continue to show a robust picture. Debt service ratios have risen from pandemic “super lows”, but they have yet to fully return to the levels that prevailed in the late 2010s. Most importantly, they remain far below the pre-GFC peak (Figure 1, page 2). And although the personal savings rate fell to 2.6% in April (the lowest level since 2008 save for Covid!), the overall picture remains reassuring given record high household net worth.
Troubling signs appear when looking below the surface. Despite a labor market near full employment, consumer delinquencies have been steadily rising for years (Figure 2). The delinquency rate on auto loans has hit a record high, credit card delinquencies are approaching the GFC highs, and even the long-dormant mortgage segment is now registering early signs of deterioration. Even in the context of a stable labor market, delinquencies may deteriorate further given tepid household income growth. Indeed, data released this week showed flat nomina income growth m/m and a 1.1% YoY decline in real personal disposable income.
Revised Q1 GDP data showed slightly weaker consumer spending growth during the quarter, which better fits the income growth trajectory. Real GDP grew 1.6% QoQ seasonally adjusted annualized in Q1, versus the 2.0% earlier estimate. We do expect overall consumer spending to slow to 2.0% this year, compared with 2.6% in 2025 and 2.9% in 2024. Any deterioration in the employment picture would represent material downside risks to this forecast.
The weak income growth and rising delinquencies combo also implies a much more constrained pricing power environment than in 2022 during the height of the supply chain-related inflation surge. We see limited second-round effects from the energy price shock.
Canada: Another weak GDP report
Q1 GDP growth was broadly flat (-0.1% QoQ annualized), undershooting both consensus expectations and the BoC’s 1.5% forecast.
Net trade was a material drag on GDP growth, largely reflecting a surge in gold imports. Weaker housing investment and a retrenchment in government spending on weapon systems, following a sharp increase in late 2025, also weighed on activity. More concerning, business investment contracted, pointing to a softer outlook amid uncertainty around oil prices, US tariffs, trade policy, and a declining population. Consumer spending rose 1.5% QoQ annualized, down from 2.9% in Q4, with relative resilience in services offset by much weaker goods demand. Overall, underlying momentum remained subdued.
This marked a second straight quarterly contraction, keeping recession risks firmly in view. The recently announced fiscal stimulus, notably the Groceries and Essentials Benefit and the temporary suspension of the fuel excise tax, should provide some near-term support to household spending. Even so, our call for growth to strengthen in H2 still hinges on a favorable USMCA renegotiation and an early end to the Middle East conflict. More broadly, if spare capacity persists and the inflation shock continues to fade, we expect the Bank of Canada to remain on hold.
Australia: Strong Q1 on the cards
Headline CPI featured a downside surprise after rising ‘just’ 4.2% YoY (down 0.4 pp from March) in April; the data supports our call for the Reserve Bank of Australia (RBA) to be on hold in June. The trimmed-mean metric printed in line with our expectations at 3.4%, up a tenth.
The easing in the headline was not only due to a 7.0% MoM fall in fuel prices as the government cut their fuel excise tax but also the easing in energy prices in general. Furthermore, without a similar rise in travel and accommodation costs, the headline would have printed even lower; the rise was due to seasonality amidst peak Easter and school holidays. New dwelling prices were up 0.7% - likely due to the continued passthrough of fuel prices by builders amid higher costs. We are now cautious if headline inflation may continue trending lower in the medium term as the Iran war is drawing to a close but continue seeing uncertainty at the margin as the passthrough in Australia is also stronger and faster than in most countries.
More positively, in line with our recent thought leadership that focused on Australia’s long-term infrastructure needs – private capital expenditures rose an eye-popping 6.5% QoQ in Q1 led by a sharp jump in machinery and equipment (18.1%) as investments in data centers seem to pick up and starting to show in macro data finally. Our GDP model had penciled 0.56% QoQ or 2.69% YoY, but we see good chance of an upside surprise as consumption likely may have held strong in Q1 as private capex printed strongly.
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