Washington – With prices across the economy – from food, gas and rent to cars, plane tickets and hotel rooms – climbing at their fastest rate in decades, you might to think that the Americans would rein in their spending.
Not so far. Consumers as a whole are showing surprising resilience, not only maintaining their spending, but increasing it even after adjusting for inflation. In April, the government said, retail sales outpaced inflation for a fourth consecutive month. It was a reassuring sign that consumers – the main drivers of the U.S. economy – continue to provide vital support and help ease concerns about the impending recession.
Yet, at the same time, there are signs that some people, particularly in low-income households, are beginning to cut back on their spending, turning to cheaper or alternative items or skipping some purchases as inflation reduces their disposable income.
Last week, for example, Walmart, which caters to price-conscious consumers, reported that more of them preferred lower-priced lunch meat brands to more expensive national brands and bought cartons. of half a gallon of milk rather than whole gallons. Similarly, Kohl’s, a mid-priced department store, said its customers were spending less with each visit.
All of this has shed light on a question that hangs over the economy: how long will consumers as a whole continue to spend at healthy levels – even gritted teeth – despite the pressures they feel from the inflation near 40-year highs? The answer will be key to whether the country can avoid a recession as the Federal Reserve prepares to raise borrowing rates sharply.
By most measures, consumers have regressed from last year’s massive spending, which was fueled by stimulus checks and other government assistance after the brutal pandemic recession. This year, noted Michelle Meyer, chief U.S. economist at the MasterCard Economics Institute, steadily rising prices have clouded the economic outlook for Americans.
Even so, Meyer said, there are reasons for optimism.
“There are still plenty of reasons to believe in consumer resilience,” she said, pointing to the robust U.S. job market and the solid wage increases many people are receiving. “There is some frustration as they navigate the environment we find ourselves in. But they are still spending.”
Consider that even though consumer sentiment as measured by the University of Michigan has plunged nearly 30% over the past year, Americans’ spending has outpaced inflation during that time. Michigan economists noted that there has been a “historic disconnect” between sentiment and actual consumer behavior.
Some economists are warning that the stability in consumer spending is unlikely to last in the face of the Fed’s aggressive credit tightening. And if consumer spending remains strong, the Fed may need to raise rates further to cool the economy and slow inflation. Earlier this month, in its quest to curb inflation, the Fed raised its benchmark rate by half a percentage point and announced further significant rate hikes to come. Some fear the economy will slide into recession next year.
Still, several trends are driving Americans’ spending, including rising wages, savings accumulated during the pandemic and a rebound in credit card use. Those savings and continued wage gains, economists say, could fuel healthy spending throughout this year.
Consumers have shifted much of their spending from appliances, electronics and exercise equipment — the types of goods many splurged on at the start of the pandemic as they hunkered down at home — to travel, entertainment and other services. The intensity of this change caught many retailers off guard and contributed to some negative earnings reports.
Target CEO Brian Cornell said the chain “didn’t expect to see the sea change” in spending away from TVs, appliances and patio furniture and toward luggage, restaurant gift cards and other items that reflect Americans’ increased desire to leave home and spend.
Southwest Airlines said growing demand for air travel will keep it profitable throughout this year. Although average fares jumped 32% in the first quarter from a year earlier, the carrier said it saw no signs of reduced demand.
For many people, the ability to travel after two years of restrictions outweighs the financial pressures of higher prices.
Mike and Marsha Dyslin, who live in San Jose, flew to Washington, DC, last week to visit their daughter, Sarah, a graduate student at Georgetown University.
“She’s been here at school for two years, and we haven’t visited all the time because of COVID,” Marsha Dyslin said. “Your priorities change.”
To save gas, Mike Dyslin said they drive their Toyota Prius more than their SUV, but haven’t made any major changes to their consumption habits.
Soaring gasoline and food prices, however, led other consumers to pull out. The national average cost of a gallon of gas soared to $4.59, up a painful 50% from a year earlier, according to AAA.
Walmart said customers are visiting its gas stations more frequently, but refilling less each time. And Kohl’s last week reported a drop in its store card payment rate after a year in which customers made large payments. Higher levels of card debt increase the risk of increased chargebacks.
Dan Gabel, a musician from Millbury, Mass., has cut entertainment spending as costs have soared far beyond what he earns. Gabel, a big band frontman and trombonist, faces soaring prices not only for gas, but for many of the items he needs for the job – from dry cleaning band uniforms to lubricant for the maintenance of instruments to the cost of paper and ink to print sheet music.
To save money, Gabel, 33, and his partner, an opera singer, ditched HBO and Netflix. Although the music concerts have been regular, Gabel now takes the train, if he can, rather than driving when he performs out of town.
“We feel the crunch,” Gabel said. “It’s all those little things that add up.”
Nationally, however, the overall resilience of consumer spending illustrates a trend that can perpetuate inflation: although people hate higher prices, they often continue to pay them if their wages also rise.
“There’s no cure for inflation,” said Laura Veldkamp, a finance professor at Columbia University. “If the prices of goods and wages rise together, that doesn’t necessarily lower demand.”
Economy-wide, median wages jumped 6% in April from a year earlier, according to the Federal Reserve Bank of Atlanta. This is the largest increase since 1990, although it is lower than the inflation rate of 8.3%.
However, a surprisingly large proportion of workers are seeing wage gains that outpace inflation: About 45% did so in March compared with a year earlier, according to research from the Indeed Hiring Lab.
Nick Bunker and AnnElizabeth Konkel, economists at Indeed, called it “remarkable” that the figure is so high given the level of inflation. It shows, they said, how desperate many employers are to find and keep workers with an unemployment rate of just 3.6% and have posted job openings near record highs.
Many other consumers have had to dip into their savings to keep spending. The national savings rate has fallen to around 6%, below pre-pandemic levels, after reaching 16.6% in 2020, the highest on record since 1948, and 12.7% in 2021.
And with more Americans turning to credit cards for spending, household debt rose 8.2% in the first three months of this year from a year earlier. It was the largest such increase since early 2008, when the economy entered a recession.
Economists say, however, that overall debt has not yet reached problematic levels. They estimate that households still have about $2 trillion in savings beyond what they would have had based on pre-pandemic trends.
And Paul Ashworth, an economist at Capital Economics, notes that household debt is equal to 86% of disposable income, significantly lower than its peak of 116% in 2008.
“Never bet against the American consumer,” Ashworth said.