FXTRADING Financial Focus (Asia-Pacific 05/26)US Consumer Risks Rise as Oil Prices Climb

The US consumer market still appears relatively resilient for now, but a growing number of companies have already started worrying about weakening demand ahead. Several major retailers believe that much of the consumer spending strength seen this spring has been supported by the large amount of tax refund money released through last years tax cuts, rather than any meaningful improvement in household incomes. As this extra cash gradually gets used up, consumer spending in the US could begin slowing more noticeably after the summer.

The Trump administrations large-scale tax cut policies previously allowed many American households to receive significantly larger tax refunds than in past years. According to data from the Internal Revenue Service, the average refund per household was close to $3,500. Large retailers such as Walmart stated that store sales clearly improved after refund payments arrived, with consumers temporarily becoming more willing to shop, travel, and increase daily spending.

At the same time, however, international oil prices have risen again following the escalation of tensions in the Middle East, while diesel prices have also remained elevated. Transportation, logistics, and food costs have continued climbing and are gradually being passed on to consumers. US grocery prices rose 2.9% year-on-year in April, while fruit and vegetable prices increased by more than 6%. Although many households are still spending, rising energy and living costs are already beginning to reduce disposable income.

Some market analysts believe the boost from tax refunds is gradually being offset by rising energy prices. If geopolitical tensions persist, elevated oil prices could push inflation higher again and further weaken consumer spending growth. For the US economy, this situation would be more difficult to manage than a simple slowdown, because consumer spending remains the most important driver of overall economic growth.

Banks and financial institutions have also started issuing similar warnings. Over the past few years, the US economy managed to remain resilient largely because household balance sheets still had some buffer capacity. However, with high interest rates and elevated living costs lasting for an extended period, household savings are steadily being depleted, while more families are beginning to reduce non-essential spending and becoming increasingly cautious about consumption.

Some retailers have already lowered their outlooks for the coming months. Consumer spending in June may still receive some support from the remaining tax refund effect, but pressure is expected to increase gradually during the summer. Rising fuel and food expenses will continue squeezing household budgets further. Auto parts retailer Advance Auto Parts also admitted that sales during this years traditional summer spending season may perform weaker than usual.

From FXTRADINGs perspective, the main issue facing the US economy right now is that household cash buffers are gradually weakening. Tax refunds can only provide temporary support. If energy prices remain elevated, slower consumer spending could eventually spread into retail activity, employment, and corporate investment, potentially increasing economic growth pressures in the second half of the year.