By Megan Leonhardt

The U.S. consumer is still holding up nicely, even after years of robust spending that has helped propel economic growth far beyond expectations. And while the extraordinary run may not be over, there is a significant caveat.

"The consumer finished last year really very strong," says David Tinsley, senior economist at the Bank of America Institute. He is optimistic that there is "quite solid momentum" still left among consumers that should deliver solid economic growth in 2025.

What happens next will depend, more than usual, on Americans' ability to stay employed and wage growth remaining relatively healthy. While wage gains and cooling inflation helped bolster Americans' real spending power over the past year, other factors that have boosted consumption are now less likely to provide a lift.

Consumers' savings have diminished, it is still difficult to borrow, and wealth effects -- the benefits of the past two years' stock market gains -- are fading.

The Spending Picture

The data so far show U.S. shoppers kept on buying at the end of last year. U.S. households' credit and debit card spending in December was up 2.2% from a year earlier, making the final month of 2024 one of the fastest for spending growth last year, according to the latest aggregated spending data from Bank of America.

December's retail sales report, released Thursday, revealed that while overall consumption was softer than expected last month, sales excluding certain volatile categories were higher than anticipated. Sales for the so-called control group, which excludes receipts from auto dealers, building-materials retailers, gas stations, office supply stores, mobile homes, and tobacco stores, jumped 0.7%.

That is the number that flows into the personal consumption expenditures component of gross domestic product growth. The December sales data indicate that real consumer spending increased by a strong 3.2% annualized rate in the fourth quarter, which should lift inflation-adjusted GDP growth to 2.5%, estimates Nationwide Chief Economist Kathy Bostjancic. Real GDP grew by 3.1% in the third quarter.

Wage Gains, Wealth Drive Spending

Much of the robust consumer spending over the past year has been driven by healthy wage growth. While pay growth for higher-income workers had failed to keep pace with the increases for lower-income people for several years, gains for the wealthier cohort caught up within the past year. That helped to lift spending growth among better-paid people as well last year.

Spending for middle- and higher-income households was up nearly 1.7% from a year earlier in December, while lower-income households' outlays were 1.3% higher, according to BofA data.

Average hourly earnings increased by 3.9% from a year earlier in December, according to the Bureau of Labor Statistics. That outstripped the rate of inflation: Seasonally adjusted, real wage growth was 1% from December 2023 through last month.

But while wage gains have held up, the wealth effect from strong market performance, which likely helped drive spending among higher-income households in recent years, may be on the wane.

Spending plans among upper-income households deteriorated sharply in January, according to the Bain & Company/Dynata consumer health indexes, released Wednesday. January is typically a weaker month for spending expectations, but the slide among upper-income households was significantly greater than in other categories.

The fact that the S&P 500 had a total return of minus 2.4% in December was likely partly responsible, Brian Stobie, senior director of macro trends at Bain, said this week.

It is too early to tell if this is a sustained shift toward more restrained spending or simply start-of-the-year noise. Bank of America's January monthly consumer survey found that more consumers planned to buy big-ticket items like home improvements and furnishings over the next three months. At the same time, though, more households reported they plan to spend less on groceries over that time, now that many holiday celebrations are complete.

Smaller Savings, More Debt

Wage growth is particularly important because Americans have less to draw on from savings and borrowing than they did just a few years ago. The savings rate -- personal saving as a percentage of disposable personal income -- was 4.4% in November, according to the Bureau of Economic Analysis.

That rate has remained relatively stable throughout the second half of 2024. But it is considerably lower than the 6.1% level of savings in November 2021, when many households still had excess money from the Covid-19 pandemic and government stimulus payments.

Over the past several years, Americans have also increased their credit-card balances and overall debt levels. Borrowers had an average of $6,380 in debt by the end of the third quarter, up 4.8% from the second quarter, the credit-rating company TransUnion reported in November. Additionally, the share of total available credit that borrowers are using is at or slightly above prepandemic levels.

Still, the increased borrowing doesn't immediately signal significant weakness, and growth in the amounts people owe is leveling off, says Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. "We had a couple of years of credit card balances, specifically, that really increased significantly in the double digits," Raneri told Barron's in December. "For 2025, we're anticipating that it's going to be stable."

Additionally, while delinquency rates have ticked higher, they are growing more slowly across credit cards and auto loans -- and even declining among personal loans, Raneri said. About 1.1% of borrowers owing at least $60 were more than 60 days late on their payments in November, up from 0.9% a year ago, according to Equifax data.

Buy-now, pay-later services also shouldn't prove to be a headwind for consumers heading into 2025. Bank of America data show that 10% of households had a BNPL payment in December, up just 0.7 percentage points from the previous year. But the data show that there isn't a significant proportion of consumers using this extended payment method excessively.

"The situation is solid at the start of this year," Tinsley said. "There are people who are squeezed, but, by and large, the aggregate picture is reasonably benign."

Write to Megan Leonhardt at megan.leonhardt@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 19, 2025 03:00 ET (08:00 GMT)

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