Consumer Spending Slows 1% Year-Over-Year, Unemployment Payments Rise

Bank of America has issued a warning that consumer spending momentum is easing across all income levels. This development comes as the number of households receiving unemployment payments continues to grow. The bank's analysis indicates that total household credit and debit card spending only rose by 1% year-over-year in April, signaling a slowdown in consumer activity. This trend is observed across various income brackets, suggesting a broad-based deceleration in spending.

The gradual easing in consumer spending momentum is not just due to lower inflation – the growth in the number of transactions has also cooled. Consumers appear to be pulling back particularly on bigger ticket discretionary services like airline tickets and lodging. Some slowdown in spending growth is consistent across income cohorts since the beginning of the year, though the spending growth of lower-income households is weakest. In our view, this partly reflects relative softness in their after-tax wage growth. In fact, lower-income households saw an after-tax wage gain of just 1.5% YoY (year-over-year) in April, a slight improvement from the previous month, but still a lower rate than the past two years, according to Bank of America deposit data.

The banking giant also warns that while the labor market continues to be strong, unemployment payments are on the rise. The number of higher-income households receiving such payments in Bank of America deposit accounts accelerated to 6.1% YoY growth in April from 1% YoY in February. Meanwhile, it increased 4.1% YoY for lower-income households and 5.7% YoY for middle-income households in April.

The easing of consumer spending momentum is a concerning sign for the economy, as consumer spending accounts for a significant portion of overall economic activity. The increase in the number of households receiving unemployment payments further exacerbates this issue, as it indicates a rise in joblessness and financial strain for many families. This dual impact of reduced spending and increased unemployment benefits could lead to a more pronounced economic slowdown if not addressed.

The economic signals flashing caution are not limited to consumer spending and unemployment. The recent contraction in the US economy during the first quarter, with a 0.3% decline in GDP, has raised concerns about the possibility of a recession. While some optimists argue that the economy could rebound, the combination of slowing consumer spending, rising unemployment, and a contracting economy paints a worrying picture.

The situation is further complicated by the fact that the unemployment rate, currently at 4.2%, is expected to rise to about 4.7% by spring 2026, according to analysts' forecasts. This increase in unemployment could lead to further reductions in consumer spending, creating a vicious cycle that could be difficult to break. The economic data deteriorating, as indicated by the expected fall in the US 10-year yield to 3.90% by the end of the second quarter, adds to the concerns about the economy's trajectory.

In summary, Bank of America's warning about easing consumer spending momentum and the growing number of households receiving unemployment payments highlights the challenges facing the economy. The combination of slowing consumer activity, rising unemployment, and a contracting economy raises the specter of a potential recession. The Federal Reserve's decision to keep interest rates unchanged adds to the uncertainty, as does the expected rise in unemployment and the deteriorating economic data. The situation calls for careful monitoring and potential policy interventions to mitigate the risks and support economic stability.