Despite high inflation, rising gas prices, deepening concern about the economy and rising recession risks, Americans keep spending money.
Stocks have fallen sharply over the past week as Wall Street frets over a likely dip in consumer spending.
Polls of consumer sentiment have fallen steadily — along with President Biden’s approval rating on the economy — and a growing number of economists fear a recession could come as soon as next year.
The combination of higher interest rates from the Federal Reserve and prices lingering at inflated levels is likely to take a chunk out of consumer spending as the year continues.
Even so, Americans as a whole have powered through rising price pressures, shifting their purchases away from pricier goods and toward budget items and services.
“April’s solid spending growth won’t likely change the Federal Reserve’s decision to raise rates by 50 basis points in each of the next two meetings. Instead, it will help to alleviate some of the recession concern that might stem from increasing interest rates,” wrote Tuan Nguyen, economist at audit and tax firm RSM, in a Tuesday analysis.
Retail spending rose 0.9 percent in April, according to Census Bureau data released Tuesday, with an uptick in spending at restaurants, bars and automobile dealers leading the increase. While spending dropped off at hobby, sporting goods, book and home supply stores, e-commerce and department store spending rose.
Spending on airline tickets and other forms of transportation also skyrocketed last month, due in part to high gas prices pushing fares higher.
Beth Ann Bovino, U.S. economist at S&P Global, said that while consumers are not happy about higher prices, they’re still depleting pent-up savings and money not spent on travel, entertainment and other potentially infectious activities during the depths of the pandemic.
“There has been a shift in the kind of spending in the consumer basket away from ‘stay at home’ spending towards ‘let’s go out’ spending,” Bovino said in a Friday interview. She pointed to an increase in spending on clothes, restaurants and bars and a decline in spending at grocery stores. Sales of home furnishings and garden goods have also held largely steady after two years of soaring home sales.
“We were pretty much stuck at home for almost two years and a lot of a lot of that discretionary spending wasn’t spent. People are still sitting on cash and that means they can be more resilient at this time,” she said.
The resilience of the U.S consumer is largely due to an unprecedented injection of fiscal and monetary stimulus since the onset of the pandemic in early 2020.
The most recent round of stimulus checks, issued in March 2021, helped fuel higher demand for goods while the country was in the early stages of national COVID-19 vaccine rollout.
But many Americans were still wary of returning to restaurants, shows, and hotels — particularly after the emergence of the delta and omicron variants. The result pushed more pent-up demand toward goods, which were already in short supply and deeply backlogged, and fueled higher inflation.
If consumer spending keeps increasing but shifts more toward services over goods, it could help the economy stay strong as the Fed fights inflation through higher interest rates. Demand for labor remains historically strong with roughly two open jobs available for each unemployed American, and economists are hopeful the labor market can hold up as the economy finds a better balance between what consumers want and what businesses can provide.
“There will be a little bit of a pull down, but I think that the shift in the mix from goods to services will be helpful for inflation. Goods demand is where we see demand pretty far beyond supply and where we see prices have gone up the most,” said Adam Ozimek, chief economist at the Economic Innovation Group, a research nonprofit.
“So as spending normalizes there, we’ll hopefully see some of those huge price increases going the opposite direction. That should be a help to the Fed.”
Ozimek, however, warned there are many obstacles in the Fed’s path beyond U.S. borders that could drive inflation higher and make it difficult to curb inflation without causing a broad economic downturn.
Oil, natural gas and food prices have skyrocketed as the war in Ukraine and its economic ripple effects dramatically reduce the availability of key commodities. Ongoing lockdowns in China, where the government has pledged to eradicate COVID-19 by any means necessary, have also spurred more factory shutdowns, port bottlenecks, delivery delays and other inflationary supply chain snarls.
Those forces together may not push the U.S. economy into recession. But if inflation continues to spiral higher, the Fed may need to hike rates fast and far enough to drastically reduce how much money consumers have to spend.
“What the Fed should do is ignore temporary supply shocks and their impacts on inflation. But where inflation is now, it’s harder to do that,” Ozimek said.
Bovino also said the if consumer spending is too resilient in the face of inflation, it could force the Fed to push even harder against consumer demand.
“Household balance sheets are relatively healthy, and that we see as a cushion to absorb these shocks,” Bovino said.
“That also means they have the wherewithal to buy more product at higher prices, making it difficult for the Fed’s policy to work. And that’s the challenge that the Fed has.”