The apparent resilience of the US economy has led market commentators to believe the Federal Reserve has little reason to stop raising interest rates to combat inflation. This tide might be turning, judging by the news flow from US companies.

Big name businesses are saying that life is getting tougher, while economists are worried that US consumer spending levels are unsustainable.

We saw a wobble on global stock markets in August and it seems reasonable to suggest the tremors could keep coming as we move towards the final quarter of the year.

A weaker economy could prompt a policy shift by the Federal Reserve. In theory, a pause or end to the rate hike cycle would go down well with investors. They might return to stocks which have been out of favour due to rate hikes.

However, a policy caused by economic weakness is not reason to celebrate. It would suggest weaker earnings prospects for companies and traditionally that is negative for share prices.

Over the past month or so, discount retailer Dollar General (DG:NYSE), Jack Daniel’s whiskey maker Brown-Forman (BF.B:NYSE), electrical goods seller Best Buy (BBY:NYSE), laptop maker HP (HPQ:NYSE) and trainers specialist Foot Locker (FL:NYSE) were among the US-listed companies either reporting weaker than expected sales or issuing a gloomier outlook.

LVMH (MC:EPA) said entry level product demand disappointed in the US, while British American Tobacco (BATS) recently flagged weakness in US cigarette volumes.

In June, Oren Klachkin, an US economist at Oxford Economics, wrote: ‘The recession will be delayed as long as consumers continue to spend.’ The areas to watch are the rate at which savings deplete and the amounts spent on credit cards.

Personal spending in the US increased by 0.6% month-on-month during July in real terms, suggesting we could see robust third quarter GDP figures. However, income only increased by 0.2% month-on-month in July.

ING suggests people feel secure in their jobs so they have maintained spending despite the cost-of-living crisis by running down savings and topping it up with credit card borrowing. That is unsustainable.

Interest rates on credit cards are high, banks are being tighter with regards to lending, and consumers continue to draw down on excess savings. ‘At the current run-rate it will all be gone by the end of the second quarter of 2024 and for low and middle incomes that point will come far sooner,’ says ING.

All this adds up to a frustrating situation. It suggests investors might start to take profits in consumer-facing names which have served them well in recent years. You can already see stocks like Best Buy and CostCo (COST:NASDAQ) start to pull back.

Plenty of other retailers remain in demand, yet investors might want to be alert to the shifting landscape. For example, home improvement retailer Home Depot (HD:NYSE) has been on a strong run since May and is the type of stock which might suffer if there is a slump in consumer spending.

While it may feel as if the US is doing well now, this geography is still capable of disappointing investors from time to time, and the outlook is starting to look a bit cloudier.

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