Tax refund excitement fades, American consumers face a fiscal cliff

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The two main pillars supporting the US consumer economy are weakening: the windfall from tax refunds is fading, and the Middle East situation is pushing up fuel costs. Analysts warn that consumer spending faces a substantial risk of decline in the second half of the year.

While US stocks repeatedly hit new highs amid the AI and semiconductor boom, the consumer side is deteriorating. The decline in tax refunds coupled with the energy shock may leave consumers facing a cash crunch this summer. Kraft Heinz’s CEO said some low-income families “run out of money at the end of the month.”

There is a stark contrast between the apparent market strength and weak consumer sentiment. Both the Nasdaq 100 and S&P 500 have reached record highs, but UBS analysts note that “the cracks in the consumer sector are widening,” and the equal-weighted consumer discretionary index has fallen below the low point during the financial crisis.

UBS points out that the excess cash buffer provided by tax refunds is gradually disappearing, and there is a ‘fiscal cliff’ risk looming in the second half of the year. As consumption pressures rise, the Trump team may step up efforts to advance the ‘affordability’ agenda ahead of the midterm elections.

US stocks are currently still driven by the AI chip and storage sectors, but cracks on the consumer end are becoming an unignorable variable. The fading of tax refunds, rising energy prices, and worsening cash flow for low-income groups will together determine how much longer US consumer resilience can last.

Tax refund effect nearing its end, retailers warn of pressure in the second half of the year

This round of consumer resilience has been highly dependent on the support of tax refunds. The average tax refund of nearly $3,500 has helped sustain household spending, and Walmart, Target, and Lowe’s have all mentioned the boost to sales from tax refunds in recent financial reports.

But this effect is fading. Target has explicitly said that the sales boost from tax refunds will gradually disappear in the second half of the year; Advance Auto Parts expects sales growth to slow as the last wave of tax refunds dissipates. Meanwhile, the personal savings rate has fallen to a three-year low, and expenditure growth continues to outpace income, indicating that consumers are overdrawing their financial buffer.

Rising energy costs are further squeezing disposable income. The national average gasoline price has stayed above the politically sensitive level of $4 per gallon for nearly two months in a row, and corporate concern about consumer health has clearly increased this earnings season.

Gregory Daco, chief economist at EY Parthenon, said: “The benefits from tax refunds have largely been offset by the oil price pressure triggered by the Middle East situation. The longer the conflict lasts, the stickier inflation becomes, and the more likely it is that consumer spending growth will be eroded—a negative scenario.”

Rising consumer credit pressure, low-income groups bear the brunt

Data shows consumer pressure is no longer just a forecast. Credit card, auto, and student loan delinquency rates are all trending up, and low-income groups remain disadvantaged in the K-shaped divergence.

PNC Bank analyst Brian LeBlanc points out that household financial health has been a critical buffer against high interest rates and high inflation in recent years, but this buffer is shrinking. Companies such as AutoZone say sales trends this quarter have shown almost no improvement over last quarter, and lower temperatures in May further suppressed demand.

Consumer discretionary stocks rose 2.3% overall last week, but there is clear differentiation within the sector. UBS analyst Mark Paski points out that retail stocks have improved recently, but the hardline retail sector remains under significant pressure; Ross Stores climbed about 8% last Friday, but that is not enough to prove a broad sector recovery.

Paski believes that certain oversold consumer stocks have a chance to rebound, provided that suppressing factors like interest rates, oil prices, and inflation expectations show signs of peaking. However, current data and corporate statements continue to reinforce a pessimistic narrative, making a short squeeze unlikely in the near term. Analysts note that the potential “fiscal cliff” on the consumer side may prompt the Trump administration to further advance the agenda of lowering living costs ahead of the midterm elections.

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