Why are Americans spending so much?

Vox.com

Their spending helped drive US economic growth in 2023 and remained high in the first months of this year.
In March, consumer spending increased by 0.8 percent, exceeding expectations from financial analysts.
There is a sign that Americans’ shopping spree might be finally coming to an end: Retail spending stayed the same in April as compared to the previous month, falling short of analyst projections for growth.
Who is driving high spending?
It’s hard to reconcile that with high spending figures.
That has helped fuel spending, but unlike in other high-income countries where consumers have proved more thrifty, Americans are close to depleting those savings.
And wealthy older Americans who allocate more of their portfolios to government bonds are benefiting from higher interest rates.
“So that’s probably not going to be a tailwind [for spending] over the next year.” At the same time, the factors currently fueling spending at the highest income levels aren’t universal.

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For years, Americans’ outlook on the economy has been bleak. Strangely enough, it didn’t seem to have much of an effect on their readiness to part with their cash.

As home-bound employees clicked “complete purchase” on everything from Pelotons to sourdough starter during the pandemic, retail sales skyrocketed. E-commerce sales increased by 43% in 2020. Americans who had never saved before now had extra cash to spend thanks to stimulus checks. The demand was greater than supply chains could handle.

All of that was expected to collapse eventually. The “death of the consumer” and the ensuing recession, which economists predicted would occur, have not come to pass for more than a year. At a 9 percent peak in June 2022 and continuing to stubbornly exceed the Federal Reserve’s target rate of 2 percent, consumers were predicted to pull back as inflation surged.

Instead, despite price increases and growth in their disposable income, Americans simply kept purchasing more. Their spending was a major factor in the US economy’s growth in 2023 and continued to be so in the early months of this year. Consumer spending grew by 0.8% in March, which was more than financial analysts had predicted.

Retail spending in April was flat compared to March, missing growth analyst projections. This suggests that Americans’ shopping frenzy may finally be coming to an end.

These figures, however, do not account for the significant increase in service spending this year, which includes things like health care, insurance, and transportation. Even though they anticipate a slowdown in spending by the end of the year, Moody’s Analytics economist Scott Hoyt and Morningstar senior US economist Preston Caldwell both predicted that those numbers could easily rebound next month.

Caldwell stated, “I am expecting that we do see a consumer slowdown eventually over the course of this year.”. It would be premature to claim that that is what is happening already. “.

Under the weight of high interest rates, which the Fed isn’t anticipated to lower until later this year or possibly not at all in 2024, spending will undoubtedly decline at some point. Why then has spending remained so strong despite all of the consumer anxiety?

Who is the primary spender?

There are two concurrently true statements: People continue to spend despite their extremely negative feelings about the state of the economy. As part of its ongoing survey, the University of Michigan found that the consumer sentiment index in May was the lowest it had been in six months, at 67 points out of 100.

While that is an increase over the same period last year, it is still far lower than the pre-pandemic consumer sentiment readings, which were primarily in the upper 80s and 90s. Consumers “expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead,” according to a University of Michigan report, indicating a broad trend in sentiment across demographic lines.

That and high spending numbers are difficult to reconcile. To put it briefly, however, a sizable portion of the nation’s spending is going to the rich, who also feel rich. The middle class also feels marginally better off, and they probably still have some savings that they can spend. In comparison to those who rent and have fewer investments, they may not have yet felt the full force of inflation and high interest rates. But change is to blame for that. ).

High-income consumers, defined as households in the top 20% of income earners as of 2022 (at least $244,025 before taxes), are well-off and have plenty of spare cash.

Following the pandemic and the stimulus checks that many households received, the average percentage of income saved by Americans increased to an all-time high of 32% in April 2020. Spending has been encouraged by this, but Americans are on the verge of exhausting their savings, in contrast to consumers in other wealthy nations where consumers have shown greater frugal behavior.

“It’s still kind of sloshing—the excess savings—through the system. Caldwell stated that the excess savings would be used up either by the middle of 2024 or possibly as late as mid-2025, depending on how you calculate it.

In spite of the fact that many affluent consumers locked in low interest rates on their mortgages prior to the Federal Reserve beginning rate hikes in March 2022, their property values are still increasing. From $287,000 in 2019 to $450,000 in 2024, the average US home price rose. High interest rates have kept would-be sellers on the sidelines because their mortgage payments would be higher if they bought a new place. This is partly the result of the continuously low inventory.

Consumers with high incomes have also witnessed an explosion in their investment portfolios over the past year. In recent months, the stock market has been testing new highs frequently; the most recent record was set on Thursday in response to fresh data indicating a slowdown in inflation. Furthermore, higher interest rates help wealthy older Americans whose portfolios contain a larger percentage of government bonds.

According to Hoyt, “that kind of gives consumers an incentive to spend out of their newfound wealth.”. Additionally, this group of customers has the easy, relatively liquid funds to do so because they still have excess savings from the pandemic. “.

How much longer can the stock market continue to rise? A correction in stocks, according to some analysts, is overdue and could finally lead some investors to empty their wallets.

According to Caldwell, “equity prices are starting to move more into arguably overvalued territory.”. Thus, it is unlikely to be a driving force behind spending in the upcoming year. “.

However, not everyone’s spending is driven by the same factors that are currently driving spending at the highest income levels. Some customers are unable to increase their spending.

Low-income Americans are struggling with rising prices, even though inflation has declined dramatically since its peak in 2022. According to consumer reports, budgets are being allocated more for basic necessities such as baby supplies and fresh produce.

Savings from the pandemic, if any, may be long gone for those living paycheck to paycheck.

Due to high interest rates, low- and moderate-income consumers are finding it more and more difficult to pay off their credit card debt. This trend may be a significant factor in the general economic downturn, according to research.

The average balance per consumer increased by 8.5% to $6,218 in the last year, despite credit card debt levels declining during the pandemic. Credit card debt levels are now back to pre-pandemic levels. More than half of those with incomes under $25,000 have credit card debt.

They may be able to count on another paycheck as long as the job market is robust, but even that may not last. That is their only solace. Experts, such as Caldwell, predict that in 2024 the rate of unemployment will increase from 3.8% to 3.9% and that wage growth will decelerate.

But in the end, low-income customers “just don’t account for that big of a share of total spending,” according to Hoyt. Spending makes up a disproportionate amount of the income distribution at the top end. “.

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