Consumers Keep Spending and Borrowing Gets Pricier
For the week ended 10/10/26.
The American consumer appears to have perfected a peculiar skill: complaining about the economy while keeping it afloat. Confidence is lousy, prices are frustrating, and apparently none of that is enough to stop us from buying another couch.
Household spending rose 6.1% in the 12 months through August, up from 4.3% growth at the end of last year. One important distinction: those are dollars spent, so higher prices account for some of that increase. Still, consumers continue to provide considerable fuel for the economy. AI data centers get the headlines; millions of households reaching for their wallets do much of the heavy lifting.
Historically, gloomy consumers tended to spend less. Since the pandemic, that relationship has become less reliable. Ask Americans how they feel, and you might prepare for a recession. Watch what they spend, and you might open another checkout lane.
There is, however, a limit to this financial enthusiasm. The personal saving rate fell to 4.1% in August, leaving households with less room to absorb a setback. Strong spending supports growth today, but spending more while saving less doesn’t provide much cushion for tomorrow. Even the American consumer eventually has to look at the statement.
Meanwhile, the bond market is delivering its own statement – and the financing charges are getting our attention.
Last week’s 10-year Treasury auction produced a yield of 5.300%, compared with 4.834% at the previous auction. That’s an increase of nearly 47 basis points. The 30-year auction followed at 5.618%, up from 5.308%, or another 31 basis points. Those are substantial increases in the government’s borrowing costs.
Economists increasingly expect elevated borrowing costs to stick around. The latest Wall Street Journal survey puts the average forecast for the 10-year Treasury yield at 5.1% by year-end. Stronger growth, persistent inflation and concerns about the federal fiscal trajectory all complicate the outlook. “Higher for longer” is beginning to sound less like a passing phase and more like an extended lease.
My take? The Fed still has work to do. Resilient demand and stubborn inflation leave room for additional hikes. But remember, the Fed controls short-term policy rates; investors determine what they require to lend money for 10 or 30 years. Washington’s appetite for borrowing matters, too.
For investors, higher yields offer better income opportunities on new purchases, while rising yields can hurt the prices of bonds already owned. The longer the maturity, generally, the greater that sensitivity. An attractive yield still deserves a careful look at the risk attached.
Despite the rate drama, markets finished the week in reasonably good spirits. U.S. stocks gained 1.2% as investors welcomed President Trump’s statement that the U.S. would not strike Iran before the midterm elections. Diesel futures also fell following his announcement of additional Russian supplies. Markets welcomed the prospect of some energy relief, though announcements and delivered fuel are two different things.
Commodities led the weekly results with a 1.8% gain, followed by real estate at 1.2%. Even bonds managed a 0.4% advance. Foreign stocks were the exception, slipping 0.3%. Yes, bonds can finish a turbulent week ahead. They just seem determined to make us nervous along the way.
Looking ahead, Wednesday brings September’s CPI report, with expectations for annual inflation of 3.6%, up from August’s 3.4%. Thursday brings retail sales data, and Fed Chair Kevin Warsh is also scheduled to speak. Between prices, spending and the Fed, we should have plenty to mull over with our morning coffee.
Have an excellent fall week, and consider supporting your local coffee shop. At $6 a latte, you can help sustain consumer spending and conduct your own inflation research – all before 9 a.m.
Good morning.
Interesting data point of the week.
Comments