—————————————————————————————————————- Despite high prices and a pessimistic outlook, consumers in the US continue to spend.
Recent data from the U.S. government indicates a significant increase in consumer spending, leading to strong economic growth. This resilience has surprised economists, Federal Reserve officials, and even goes against negative opinions expressed by Americans in polls.
According to the government’s report on Friday, consumer spending increased by a strong 0.4% in September, despite inflation and the increasing cost of borrowing for Americans.
Economists warn that the current level of spending is unlikely to be sustained in the future. This is because many households have been depleting their savings and relying more on credit cards. Moreover, the savings that were accumulated during the pandemic through stimulus aid and reduced expenses are almost exhausted, according to economists.
However, the reality is that the future remains uncertain, given the unique circumstances of the economy after the pandemic. Many economists have predicted a decline in consumer spending and a subsequent recession for over a year. However, there is currently no sign of a recession and overall, consumers seem to be doing well. While spending may decrease in the upcoming months, it is not certain that it will completely collapse.
The government announced on Thursday that the economy grew at a rate of 4.9% in the third quarter of 2021, the highest rate since 2021. This growth was driven by an increase in spending by Americans, particularly on items such as used cars, dining out, air travel, and hotel stays. Despite higher prices, a significant portion of this spending was on non-essential items, indicating that many people are feeling financially secure and confident in their job stability.
The lasting nature of that expenditure has grabbed the notice of Federal Reserve officials, who have indicated that they will maintain their primary interest rate during their upcoming meeting. However, they have also stated that they are closely watching economic data for any indication that inflation may resurface and necessitate additional rate increases.
In a recent speech, Christopher Waller, a prominent member of the Federal Reserve, expressed his astonishment at the enduring strength of consumer spending.
Currently, companies, particularly those in the extensive service industry, are profiting from a noticeable increase in demand, most likely due to affluent individuals, following the limitations of the pandemic. Royal Caribbean Group announced strong quarterly profits last week as tourists flocked to their cruise ships and spent more, despite raised prices.
“The increase in consumer expenditure on experiences has led us to yet another exceptional quarter,” stated CEO Jason Liberty. “Moving forward, we anticipate a growth in demand.”
What is the reason for the large profits thus far? Economists attribute this to several factors: Steady job growth and low unemployment rates, as well as strong financial stability for most households as they recover from the pandemic. Wealthier households, in particular, have seen significant increases in the value of their homes and stock investments, which are likely contributing to their higher spending.
Consistent employment has decreased the unemployment rate to a nearly 50-year low of 3.8%, and has also increased the number of women aged 25 to 54 who are employed to a record high. The rate of layoffs is currently at its lowest point in history. With an increase in jobs comes an increase in income, usually resulting in higher levels of spending.
According to Tim Duy, the head economist at SGH Macro Advisers, we still believe that it is not wise to underestimate the consumer until there are clear signs of job losses.
In the third quarter of July to September, there was an increase in American consumer spending on durable goods such as furniture, appliances, jewelry, and luggage. These are items that people tend to reduce their spending on when they are concerned about their employment or the state of the economy.
With inflation slowing — it’s at a still-high 3.7%, down from a peak of 9.1% in June 2022 — average wages are starting to outpace price gains. By some measures, wage growth hasn’t yet fully offset the inflation surge that began in 2021. But since late last year, pay has risen faster than prices, likely fueling some spending.
Julia Pollak, the chief economist at ZipRecruiter, has observed that companies in industries with lower wages, such as hotels, restaurants, and warehouses, have faced difficulties in retaining and recruiting workers. As a result, these companies have increased their wages. Pollak has calculated that for the bottom 10% of workers, wages have risen by 25% since the start of the pandemic in the first quarter of 2020. This is significantly higher than the 18% increase in prices during the same period.
A recent report from the Federal Reserve suggests that the majority of households experienced an improvement in their financial situation in the year 2023 compared to before the pandemic. The median household’s net worth, which falls in between the wealthiest and poorest, increased by 37% from 2019 to 2022 due to rising home prices and stock market growth. This was the largest increase seen in over 30 years of recorded data.
The majority of the money saved by Americans over the course of the last three years has primarily gone to the richest households, who have spent it on luxuries such as travel and other leisure activities. According to economists, it is common for the top 20% of Americans to make up around 40% of overall consumer spending.
The wealthiest 10% of households saw their net worth increase by $28 trillion, or approximately one-third, between the first and second quarters of 2020, according to the Federal Reserve. While the bottom 50% of Americans experienced a larger percentage increase, their total gain in dollars was much less, going from around $2 trillion to $3.6 trillion. (These numbers are not adjusted for inflation.)
According to Sarah Wolfe, an economist at Morgan Stanley, the increase in wealth over the past three years is contributing significantly to consumer spending, more so than previously anticipated.
Bret Csencsitz, the managing partner of Gotham Restaurant in New York City, can confirm this trend. The increase in spending by middle-aged customers has helped offset the loss of older patrons who left the city due to COVID. These customers, who are often employed in the technology and finance industries, are purchasing wine bottles priced at $150 to $200 and spending around $200 for a steak dinner for two.
The average individual bill has increased by more than 20% to around $145 from before the pandemic, according to the speaker. He also mentioned hosting groups of up to 60 individuals for meals at his restaurant.
“He mentioned that individuals have returned and that there is a heightened sense of liveliness.”
According to Aditya Bhave, a senior economist at Bank of America, the increase in spending is not solely attributed to the wealthy. The amount spent on the bank’s credit and debit cards by households earning less than $50,000 has actually increased at a faster rate compared to that of higher-income clients.
Despite being financially aware, certain Americans still find opportunities to treat themselves. For example, Valerie Zaffina, a 74-year-old retired educator, recently purchased a piece of jewelry from a Kohl’s store in Ramsey, New Jersey. She revealed that both she and her husband have limited incomes and are prudent with their expenses.
However, Zaffina has made the decision to splurge on her rental apartment, spending approximately $5,000 on decorations, which includes a $2,500 couch and a $600 rug. This is her first major decorating endeavor in nearly two decades.
“I experienced a year filled with frustration, so I decided to do something for myself,” she explained. “I am currently in the process of redecorating, but I am carefully managing my expenses.”
Several experts continue to caution about a fresh set of challenges affecting individuals and the economy. For instance, approximately 30 million individuals with student loans had to begin making payments this month. Moreover, the current dysfunction in the government could result in a shutdown next month.
According to a recent report, despite a decrease in real income and savings, consumers continued to increase their spending. Economists warn that this trend is not sustainable.
Despite initial concerns, the challenges posed by student loan payments may not be as harmful as anticipated. According to Bhave, payments have already increased, even prior to the deadline of October 1 for resuming them. Additionally, it seems that very few borrowers have utilized the 12-month grace period offered by the Biden administration, indicating that most borrowers are able to continue repaying their loans – at least for the time being.
Executives at Visa have reassured that the repayment of student loans will not significantly affect their earnings, as their U.S. credit card customers have shown a significant increase in overseas spending during the third quarter.
Visa’s CFO, Christopher Suh, stated that the company is not considering any potential effects of loan repayments as there has been no significant impact observed. Suh also mentioned that consumer spending has remained steady since March across all income levels.
According to Bhave, there is a prevailing sense of negativity among consumers, but the data continue to exceed expectations.