Not yet. Consumers are showing astonishing resilience overall, not only maintaining their spending but increasing it even after adjusting for inflation. In April, the government said, retail sales surpassed inflation for the fourth consecutive month. It was a reassuring sign that consumers — the primary drivers of America’s economy — were still providing vital support and helping to allay concerns that a recession may be imminent.
Still, there are indications that some people, especially those in low-income households, may turn to lower-priced or alternative goods or skip some purchases altogether, as inflation reduces their disposable income. starting to cut.
Last week, for example, Walmart, which caters to price-conscious consumers, reported that more of them were endorsing low-cost store brands of lunch meats over pricey national brands and half a gallon of milk instead of a full gallon. Were buying a gallon carton. Similarly, Kohl’s, a mid-price department store, said its customers are spending less on each visit.
All of which has ignited a question floating over the economy: how long will consumers continue to spend at healthy levels – albeit through the teeth – despite the pressure they are feeling from inflation near 40-year highs. ? The answer will be crucial as to whether the country can survive a recession as the Federal Reserve moves to raise lending rates faster.
By most measures, consumers have made up for last year’s swell spending, which was fueled by stimulus checks and other government aid after the brutal pandemic slowdown. This year, Michelle Meyer, chief US economist at the Mastercard Economics Institute, said ever-increasing prices have dampened Americans’ outlook for the economy.
Still, Meyer said, there is some reason for optimism.
“There are still plenty of reasons to believe in consumer flexibility,” That said, pointing to the strong US job market and the solid wage growth many people are getting. “There’s a certain amount of frustration in the environment we’re in. But they’re still costing.”
Consider that consumer sentiment, as measured by the University of Michigan, declined nearly 30% over the past year, during which time Americans’ spending outpaced inflation. Michigan economists have noted that there has been “Historic Disconnect” between emotion and actual consumer behavior.
Some economists have warned that stable consumer spending will be unlikely due to the Fed’s aggressive credit tightening. And if consumer spending remains strong, the Fed may eventually have to raise rates even further to cool the economy and slow inflation. Earlier this month, in its quest to tame inflation, the Fed raised its benchmark rate by half a percentage point and signaled additional large rate hikes. Some fear that the economy may go into recession next year.
Still, several trends are driving Americans’ spending, including rising wages, accumulated savings during the pandemic, and a rebound in credit card use. Economists say those savings and continued wage gains could fuel healthy spending this year.
Consumers are shifting most of their spending away from appliances, electronics and exercise equipment – a variety of goods in the early days of the pandemic, while hunkering down at home for travel, entertainment and other services. The intensity of that shift stunned many retailers and contributed to some negative earnings reports.
Target CEO Brian Cornell said the chain “Didn’t expect to see dramatic changes” In spending away from TVs, appliances and patio furniture and toward furnishings, restaurant gift cards and other items that reflect Americans’ growing willingness to leave home and spend.
Southwest Airlines has said rising demand for air travel will keep it profitable until this year. Although average fares jumped 32% in the first quarter compared to a year ago, the carrier said it showed no signs of slowing down in demand.
For many, the opportunity to travel after two years of restrictions outweighs the financial pressure of high prices.
Mike and Marsha Deslin, who live in San Jose, went to Washington, DC last week to visit their daughter, Sarah, who is a graduate student at Georgetown University.
“He’s been at school here for two years, and we haven’t been there the whole time because of COVID,” Marsha Deslin said. “Your priorities change.”
To save gas, Mike Deslin said he’s driving a Toyota Prius more than his SUV, but otherwise hasn’t made any major changes to his spending habits.
However, rising gas and food prices have repelled other consumers. According to the AAA, the national average cost of a gallon of gas has risen to $4.59, up 50% from a year ago.
Walmart has said its shoppers are coming to its gas stations more often but filling up less each time. And Kohl’s last week reported a drop in payment rates for its store cards after a year in which customers made large payments. Higher levels of card debt increase the risk of an increase in delinquency.
Dan Gabel, a musician in Millbury, Massachusetts, has slashed his entertainment expenses because the costs have exceeded his earnings. Gabel, a big band leader and trombonist, is facing rising prices not only for gas but also for the many items he needs for the job – from dry-clearing band uniforms to lubricants for maintaining equipment. And up to the cost of ink to print musical scores.
To save money, Gabel, 33, and her partner, an opera singer, have left HBO and Netflix. Although concerts have remained stagnant, Gabel now takes the train, if he performs out of town, rather than drive.
“We’re missing out,” Gabel said. “These are all the little things that add up.”
At the national level, however, the overall flexibility of consumer spending reflects a trend that could perpetuate inflation: although people hate higher prices, they often keep paying them if their wages are rising as well.
“Inflation doesn’t go away on its own.” said Laura Veldkamp, ​​finance professor at Columbia University. “If the prices of goods and wages rise together, this does not necessarily lead to a decrease in demand.”
In the economy, the average wage jumped 6% in April from a year earlier, according to the Federal Reserve Bank of Atlanta. This was the biggest increase since 1990, although it was well below the inflation rate of 8.3%.
A surprisingly large proportion of workers, however, are receiving wage benefits higher than inflation: About 45% did so in March compared to a year earlier, according to Indeed Hiring Lab’s research.
Nick Bunker and Annalizabeth Konkel, actually economists, called it “remarkable” The figure was so high considering the level of inflation. This reflects, he said, how many employers are desperate to find and keep workers with unemployment and job openings posting near record highs.
Many other consumers have had to draw on their savings to continue spending. After reaching 16.6% in 2020, the national savings rate has fallen from pre-pandemic levels to nearly 6%, reaching a record high in 1948 and 12.7% in 2021.
And as more Americans turn to credit cards for spending, home debt rose 8.2% in the first three months of this year compared to a year earlier. It was the biggest such increase since early 2008, when the economy was entering a recession.
However, economists say the total debt has not yet reached problematic levels. He estimates that households still have about $2 trillion in savings they would have had based on pre-pandemic trends.
And Paul Ashworth, an economist at Capital Economics, notes that household debt equals 86% of disposable income, well below its peak of 116% in 2008.
“Never bet against the American consumer,” Ashworth said.
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