The US Federal Reserve has raised interest rates by 225 basis points so far this year, with more potentially on the cards. One indicator likely to feature prominently in the Fed’s thinking as it weighs the scale of further hikes is consumer strength. It plays a central role in the Fed’s decision-making, but the data paint a mixed — and sometimes confusing — picture. Consumer Health Indicators Bank of America believes unemployment is the “most important” metric for determining consumer health. In a July 27 note, analyst Mihir Bhatia said consumers are likely to be able to meet their monthly card payments and loans as long as they remain employed. The US added 528,000 new jobs in July as the unemployment rate fell to a pre-pandemic low of 3.5%, suggesting the labor market remains on strong footing. Wage growth also edged higher as average hourly earnings rose 0.5% for the month and 5.2% from the same period a year ago. Another closely watched indicator is consumer spending, which accounts for more than two-thirds of US economic activity. Consumer spending rose more than expected in June, with the consumer spending price index rising 1.0% from a month ago – the biggest monthly gain since February 1981. ‘A series of rising risks’ But Wells Fargo warned that consumers are dipping into their savings to keep up their spending as incomes cannot keep up with prices, which have risen at their fastest rate since the early 1980s. “We’re concerned that the consumer’s uncanny stamina will soon run out,” Well Fargo senior economist Tim Quinlan said on July 29. goods and services in June, from both high- and low-income consumers. He added that consumer sentiment is at a decade high, as measured by the University of Michigan’s Consumer Sentiment Index — widely seen as a reliable barometer of consumer confidence in the economy. Goldman Sachs also sees “a range of rising risks” as lower consumer confidence, eroding wealth and inflation affect consumers’ willingness to continue spending by drawing on savings. Read more Wall Street banks like growth stocks again. Here are the top picks from Goldman and more. This small-cap fund has outperformed the S&P 500 this year. Here are the stocks it owns BlackRock: The era of steady growth is over, but here’s how investors can prepare for it. Meanwhile, second-quarter earnings reports from several consumer names have further fueled the debate about consumer strength. Bank of America noted that while the overall message from major pure-play card issuers such as American Express is one of continued strong consumer balance sheets, some consumer companies such as Walmart and Bath & Body Works have painted a picture of a stressed consumer and accordingly lowered their outlook for 2022. How to Position With many market observers now warning of downside risks ahead, how should investors position themselves in this environment? Barclays has compiled a list of stocks it believes can thrive even as spending eases. The list includes Archer Daniels Midland, McDonald’s, Coca-Cola, PepsiCo, fertilizer company Nutrien and online travel platform Expedia. Morgan Stanley said it is already seeing early signs that consumers are cutting back on purchases such as tobacco, groceries and fast food. It expects this to “expand rapidly” to other categories if inflationary pressures on consumer spending continue. Potential beneficiaries of such a shift would include discount retailers TJX and Ross Stores, beverage company Molson Coors Beverage, and fast-food chains Yum! Brand and Domino’s Pizza. Goldman Sachs sees more opportunity in high-quality defensive and discretionary names as it sees consumer spending improving next year. Its top picks include Target and Chipotle Mexican Grill.