American consumers won't save the economy in 2024 and their wild holiday spending spree was a 'last hurrah', Wells Fargo says

• Consumers won't rescue the US economy in 2024.
• That's because shoppers can't keep up their frenzied pace of spending forever, Wells Fargo warned.

American consumers won't be able to prop up the US economy forever, and their wild spending spree over the holiday season was likely a "last hurrah," according to Wells Fargo.

Retail sales came in hotter-than-expected in December, rising 5.6% year-over-year. That shows consumers have than kept up with the pace of inflation but it's unlikely to last, the bank said, given the weakening economic picture.

Small firms are likely already preparing for a slowdown, with small business optimism registering below its 50-year average for the 24th month in a row in December, according to the National Federation of Independent Business. That's a warning sign that businesses could soon start slashing inventory, for fear of being caught with too much product by the time the economy starts to meaningfully slow.

The job market also looks poised to keep softening, especially if the Fed chooses to keep interest rates higher-for-longer. The unemployment rate ticked higher for most of 2023, finishing off the year at 3.7%. Higher unemployment could trigger a classic recession indicator – and it could easily influence Americans to pull back on their discretionary spending.

Some consumers already look to be in a precarious financial situation as they draw down their excess savings from the pandemic. The percentage of credit card balances that were at least 30 days late ticked higher to 3.2% – the highest rate of delinquency seen in 10 years, according to the Philadelphia Fed.

"Americans with jobs and money in their pockets are going to spend. However, as the economy slows as we move through the middle portion of this year and the labor market softens, we continue to believe the holiday spending that occurred last year was a bit of a last hurrah for the consumer," Wells Fargo senior global market strategist Scott Wren said in a note on Wednesday.

"We do not believe that good holiday sales mean the spending strength will continue into and through the middle of this year."

Strong consumer spending is believed to have propped up growth for much of 2023 as the Fed aggressively raised interest rates to control inflation. A pullback in consumer spending could easily spark a consumer-led slowdown, Macquarie warned in a recent note, which would push the US close to a recession.

Wells Fargo is forecasting the economy to slow "noticeably" in mid-2024.

Others on Wall Street still see the opposite, with the prospect of a soft-landing becoming more of a consensus view as the expectations rise for the Fed to turn dovish and start cutting interest rates this year.