News & Insights

Never Bet Against the US Consumer

Despite a softening job market and concerns over the impact of tariffs, consumers continue to drive the American economy. Retail sales were up a robust 0.6% for August, with broad-based gains across most sectors strengthening over the past few months, following a dip earlier in the year. While this data is a little stale given the unavailability of government data due to the shutdown, there are weekly private measures of retail sales, such as the Johnson Redbook Index, that show strength with an increase of over 5% year over year.

Consumer balance sheets remain healthy. Household leverage continues to decline, and debt relative to disposable income remains well below pre-pandemic levels. A large percentage of homeowners are locked into low-interest rate long-term mortgages, protecting them from the Fed’s rate hiking cycle which began in 2022. Delinquencies on consumer debt, which had risen over the past couple of years, have stabilized, except for student loans, which have soared since loan repayments resumed. Average credit scores have dropped, but the dip is concentrated among the least creditworthy borrowers, with most borrowers seeing scores improve.

Disposable personal income is rising again after a worrisome sharp dip in May. Spending has also recovered after a similar fall following a “pull forward” for new cars in advance of announced tariffs. Growth in personal income, underpinned by strong gains in wages and salaries, was recently reported at a rate of 5% year over year. Similarly, depending on the consumer sentiment survey reviewed, expectations on job loss, spending and income growth have all stabilized or improved.

With stocks at record highs, a “wealth effect” is supporting the buoyancy in spending, with stocks now surpassing homes and real estate as the largest asset category of household wealth. High-income households, which own the bulk of stocks and mutual funds, have seen their net worth soar even as home values have flattened, and are now driving the growth in spending and consumption. The wealthiest 10% of households now account for 48% of all consumer spending, the cohort’s highest share ever.

While a few consumer segments are under strain, American consumers remain in good shape, poised to continue spending and contributing to economic growth.

Redbook Retail Sales Weekly Index Year-Over-Year

Source: Bloomberg

Personal Income and Spending Month-Over-Month % Change

Source: Bloomberg

Consumer Delinquencies (90+ Days) by Category

Source: Bloomberg

No Risk-Free Path for the FED

In balancing its dual mandate, the Federal Reserve is clearly prioritizing the labor market with its recent actions, even as inflation remains well above its 2% target. Fed Chairman Jerome Powell has acknowledged that there is “no risk-free path for the Fed.” Nonetheless, the FOMC cut another 25 basis points and announced an end to the Fed’s balance sheet reduction. Another rate cut is possible in December.

In a cautiously dovish move, the Fed is willing to look past the recent surge of inflation, with Powell explaining that tariffs have added 0.5% to 0.6% to one-time price increases. Absent the effect of the tariffs, the Fed views inflation as continuing to move toward their target.

Despite the transitory nature of tariff-induced price increases, the Fed seems somewhat flippant about the potential overstimulation of demand in the late stages of a business cycle. In their previous meeting, Fed governors cited the weakening job market to support their decision while curiously raising their projections for GDP growth and inflation in 2026 and lowering their projections for the unemployment rate as compared to its June forecast. Financial conditions, a key barometer for the Fed, are looser than at almost any other time in the index’s history, supported by record high stock markets. Goldman Sachs estimates that looser financial conditions will contribute 1.7% to GDP over the next year.

In the Q&A session after the recent Fed meeting, Powell admitted the paucity of new jobs probably is governed more by a stagnating labor force than by shrinking demand for workers. He noted that some members fear stimulating demand for labor in a supply-constrained market, possibly exacerbating wage inflation, already running over 5% year-over-year. Others, including Powell, were somewhat dismissive of that risk.

The Fed also announced the end of its balance sheet runoff to further ease monetary policy. With the recent stress seen in the repo and funding markets, this significantly reduces the risk of an illiquidity event similar to the 2019 repo crisis. The Fed will also shorten the duration of its balance sheet, including continuing to run off mortgage-backed securities while investing the proceeds in short-term treasuries. This will put upward pressure on longer-term yields as the Fed will not be positioned to mop up excess supply.

Market-Based Expectations for Federal Reserve Interest Rates

Source: Bloomberg

US Financial Conditions Index

Source: Bloomberg

Key Market Indices Performance

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Frost Investment Advisors, LLC, a wholly owned subsidiary of Frost Bank, one of the oldest and largest Texas-based banking organizations, offers a family of mutual funds to institutional and retail investors. The firm has offered institutional and retail shares since 2008.

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This commentary is as of Nov 6, 2025, for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Managers’ opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented in this commentary was obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not indicators or guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification strategies do not ensure a profit and cannot protect against losses in a declining market. All indices are unmanaged, and investors cannot invest directly into an index. You should not assume that an investment in the securities or investment strategies identified was or will be profitable.

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