US Consumers Keep Spending despite High Prices and Gloomy Outlook – Can it last?

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US Consumers Keep Spending despite High Prices and Gloomy Outlook – Can it last?

WASHINGTON – October 31, 2023

Lastest data from the U.S. government has illuminated an intriguing trend: American consumers are exhibiting robust spending habits, propelling strong economic growth, despite economic headwinds, high prices, and a gloomy public sentiment. This unexpected resilience in consumer spending has left economists, Federal Reserve officials, and even the American public scratching their heads.

In September, consumer spending in the United States surged by a noteworthy 0.4%, even when adjusted for inflation and amidst rising borrowing costs. Economists are quick to point out that this level of spending might not be sustainable in the upcoming months. Many households are dipping into their diminishing savings, while others are increasingly relying on credit cards. The considerable savings that had accumulated during the pandemic, thanks to government stimulus aid and limited opportunities for travel and entertainment, have been nearly exhausted. Despite this, the path ahead remains uncertain due to the unprecedented nature of the post-pandemic economy. Economists have been predicting an impending recession for over a year, often referring to it as the “death of the consumer.” However, there is currently no recession on the horizon, and consumers, as a whole, seem to be in robust financial health. While there may be a slowdown in spending in the coming months, a collapse is far from certain.

The recent announcement from the government revealed an impressive 4.9% annual growth rate in the U.S. economy during the July-September quarter, marking the fastest pace since 2021. This growth was primarily driven by increased consumer spending, as people indulged in activities such as purchasing used cars, dining out, air travel, and hotel stays. Even when factoring in higher prices, a significant portion of this spending involved discretionary items, indicating that many Americans maintain confidence in their financial situations and job security.

Federal Reserve officials have taken note of this enduring consumer spending behavior. In response, they have signaled their intention to maintain key interest rates during their upcoming meeting. However, they remain watchful of economic data for any signs of rekindled inflation, which could necessitate further rate hikes.

Notably, businesses, particularly those in the extensive service sector, are benefiting from what appears to be pent-up demand, primarily driven by higher-income individuals who emerged from pandemic restrictions. Companies like Royal Caribbean Group reported robust quarterly earnings as travelers flocked to cruise ships and were willing to pay higher prices for experiences.

Several factors contribute to the resilience of consumer spending, including strong employment and low unemployment rates, as well as healthy financial situations for most households post-pandemic. Wealthier households, in particular, have witnessed significant growth in home values and stock portfolios, which are fueling their spending.

Furthermore, consistent job growth has reduced the unemployment rate to a near-five-decade low of 3.8% and boosted employment among prime working-age individuals (ages 25-54) to a record high. Layoff rates are at historic lows, leading to more income and, consequently, increased consumer spending.

Economists emphasize that it is unwise to bet against the consumer unless actual job losses are on the horizon. During the period spanning from July to September, U.S. citizens raised their expenditures on long-lasting items like furniture, jewelry, appliances,and luggage. These items are typically the first to experience reductions in spending when economic uncertainties arise. With inflation beginning to slow and average wages outpacing price increases, consumers have more purchasing power. While wage growth has not completely offset the surge in inflation that began in 2021, pay has been rising faster than prices since late last year.

In lower-paying industries like hospitality and restaurants, businesses have struggled to attract and retain workers, forcing them to raise wages. This has resulted in significant wage growth for the lowest-paid 10% of workers, increasing by 25% since the first quarter of 2020, surpassing the 18% increase in prices during the same period.

Most American households entered 2023 in a better financial position than before the pandemic, with the median household’s net worth increasing by 37% between 2019 and 2022. This growth is largely attributed to increased home prices and stock market gains.

Nonetheless, a significant portion of the accumulated savings has gone to wealthier households, who have engaged in travel and experiences. Typically, the wealthiest one-fifth of Americans account for about two-fifths of all spending.

The wealthiest one-tenth of households saw their net worth increase by about one-third from the “first quarter of 2020” to the “second quarter of 2023,” while the lower-income group saw a smaller percentage increase in total dollars. The top one-tenth’s net worth increased by $28 trillion during this period, compared to the lower-income group’s increase from about $2 trillion to $3.6 trillion (figures not adjusted for inflation).

This newfound spending power is also evident in small businesses, where high-dollar spending by middle-aged customers has replaced many older patrons who left urban areas during the pandemic. These customers, typically employed in technology and finance, are willing to spend generously on dining and entertainment, resulting in substantial revenue increases for establishments.

Despite ongoing challenges, such as the resumption of student loan payments for nearly 30 million borrowers and potential government shutdowns, signs suggest that these obstacles may not be as detrimental as initially feared. Student loan payments began increasing even before the October 1 deadline, indicating that most borrowers can afford their loans for the time being. Additionally, executives at Visa reported strong earnings and increased spending by U.S. credit card customers overseas in the third quarter, downplaying the impact of student loan repayments on consumer spending.

The continued resilience of U.S. consumer spending continues to defy economic forecasts, offering optimism for the post-pandemic economy, despite the challenges that persist.

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