US economy: rates and the consumer hold the key

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Recently some well-recognized economic forecasters have indicated that the probability of a recession in the US in the near term is in the 50% to 60% range, with some noting that it is possible that the country is already in a mild recession.

The determination of when a US recession begins and ends is made by the National Bureau of Economic Research. Because there is a lag between when the data becomes available for such a determination to be made is published and the eventual decision, it is entirely possible for the economy to be in a recession without one being formerly declared until much later.

Outside of the eventual impact of the US tariff regime, there are two main reasons to be concerned about a current or near-term recession. One of the reasons would be a decline in investment spending on both capital for businesses and residential real estate. The other reason is a slowdown in consumer spending growth.

The chart below shows consumer spending at all retailers (in store and non-store/e-commerce sales) and general merchandise (department/multi-line retail) stores through July 2025. After a surge that began in 2020 through 2021, fuelled by approximately $5.5trn of stimulus/handouts from the US government to households, the growth rate has slowed to a more normal pace similar to pre-pandemic trends.

Source: US Census Bureau

It is important to note that the retail sales data is not inflation-adjusted and that it is hard to make such adjustments since a retail sales inflation index is not available. Nonetheless, there is concern that without more stimuli, the above long-term trend in retail sales may not be sustainable.

A review of the inventory-to-sales ratio (the value of goods held in storage to support sales) for both groups of retailers has been relatively flat at $1.30 of inventory per $1 of sales. This data, in the chart below, is seasonally adjusted. However, even the seasonally adjusted data also indicates that through July of this year, there has not been a build-up of inventories in advance of further tariff hikes or the typical fourth quarter seasonal consumer spending increase.

Source: US Census Bureau

If retailers are not stocking up, why would that be? There are several reasons. One of them is that data on consumer finance indicates that they had been using credit cards to finance their spending, perhaps to make up for the lack of additional stimulus funds. Credit card payment delinquencies as a percentage of all credit card accounts are almost as high as they were during the “Great Recession” of 2007-2009.

Source: FRBNY Consumer Credit Panel/Equifax

Consumer spending data published by Circana indicates that consumers are eating out less frequently and focusing their spending on store brands of goods instead of national brands. Spending on apparel and furniture has also decreased. Even the cardboard box industry is seeing lower sales, although that may also be due to shippers shifting to paper and plastic wrapping.

Regardless of consumer spending patterns, there are other worrying signs such as increasingly negative trends in the labor market and long-term unemployment is clearly on the rise.

Consumer spending represents close to 70% of GDP in the US. If consumers start to reduce their spending, a “garden variety” recession could occur. However, if the Federal Reserve continues to reduce short term interest rates, and long-term interest rates (such as the 10-year U.S. Treasury bond yield) do not rise, then a recession may be avoided.

Given the macroeconomic trends in place and the available data on retail inventories so far, it does not appear that retailers have stocked up very much in advance of tariffs and would suggest they are expecting, at best, tepid fourth quarter holiday sales.

This does not bode well for the containerised maritime freight industry.

Widely viewed as one of the foremost experts on ports, rail, and infrastructure in the US, Walter Kemmsies currently advises several major US port authorities and is routinely asked to work on complex issues with various investment banks. private equity firms, and public regulatory agencies. Dr Kemmsies was Chief Economist for Moffat & Nichol, and other previous roles include Head of European Strategy at JP Morgan in London, and Head of Global Industry Strategy at UBS in Zurich.