One of the reasons inflation has maintained its grip on the US economy is that US consumers continue to spend, seemingly undeterred by rising prices, which has actually helped fuel them. But how long will all these expenses last?
The combined impact of federal aid in the early months of the pandemic, the ensuing stock market boom, and record unemployment left consumers afloat, prompting many to splurge on everything from homes to new and used vehicles and vacations. But all that spending has helped create a supply squeeze that has led to the very price increases that now plague buyers.
To counter the unprecedented demand for goods and services, the Federal Reserve raised its key rate to a level not seen in years. This caused the stock market to crash, house prices to stop growing, and interest rates for things like automobiles and credit cards to soar.
As a result, economists are increasingly predicting a significant economic downturn.
“With the deterioration of the global economy expected to weigh heavily on exports soon and domestic demand slowing due to soaring interest rates, we believe it will only be a matter of time before the economy starts to contract,” said Andrew Hunter, senior. US economist at research and advisory group Capital Economics, in a note to clients on Wednesday.
But exactly when a recession will hit remains a matter of debate – and could still be a long way off, given a mix of indicators that paint the complex picture of the health of the US economy. This has given some consumers an opening to spend lavishly this holiday shopping season. And this could prove to be the last hurray for Americans’ spending spree before a real economic downturn hits in the coming year.
Few signs of slowing down
There have been few signs of a slowdown in US buying in recent months. Consumer spending rose 0.6% in September, better than the 0.4% expected. Casino operator Caesars Entertainment told investors this week that October was “the strongest month in Las Vegas history” for the company.
This is perhaps the clearest sign of consumer enthusiasm in today’s economy.
Some companies reported record revenue in the last quarter, including Apple, Airbnb, Ohio entertainment venue Cedar Point, General Motors and Samsung.
These high incomes have helped boost the labor market. At a news conference after the announcement of the Federal Reserve’s latest rate hike, Fed Chairman Jerome Powell said demand for workers remained strong, a sign that many companies continued to hire .
“We continue to look for signs that the start of a gradual easing is happening and it may be there, but it’s not obvious to me because wages aren’t falling, they’re just moving sideways to a high level,” Powell said.
In a recent report titled “2022 Holiday Sales: The Last Hurrah,” Wells Fargo economists forecast another healthy, albeit slightly more muted, holiday sales season than the past two years.
“Despite the pandemic, holiday sales grew at a historic rate for the 2020 and 2021 holiday seasons,” the economists wrote. “This year, with pandemic fears now largely in the rearview mirror, consumers are looking forward to a more typical holiday shopping season.”
But simple math dictates that consumers will eventually run out of the means to spend, they write. Notably, the cash reserves that households had built up over the previous two years began to decline. This is happening at the same time that people are saving less and wages in many cases are not keeping up with inflation.
“The sand is running out of the hourglass,” Wells Fargo senior economist Tim Quinlan said in a follow-up interview with NBC News.
The likely downturn will be moderate, he said, resembling more the bursting of the dot-com bubble in 2000 than the Great Financial Crisis of 2008 or the dramatic fall of the pandemic in the spring of 2020.
“Consumers will say, ‘It’s not sustainable. I can’t always eat the corn seeds and use my savings to fund my lifestyle where I spend more than I earn,'” Quinlan said.
But consumers should hold up well this holiday season, experts say. In a survey of nearly 5,000 shoppers, Deloitte found that 74% of respondents said they would spend more or the same during the holidays than they did a year ago. This compares with 75% who said the same in 2021.
“It’s going to be a good, strong season,” said Rodney R. Sides, vice president and head of US retail at Deloitte. “We’re not going to set any records, but the consumer continues to pull us through.”
Of course, that doesn’t change the facts of the inflation age: consumers are losing purchasing power, simply because their dollar hasn’t gone as far as it did last year. But they’ve proven remarkably resilient, said Kayla Bruun, economic analyst at Morning Consult.
“But how quickly that tank of fuel will run out, we’re not really sure,” Bruun said. “Because of the strength of the labor market, which has been the driver that has been able to do this, things seem to be holding up.”
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