People walk down Fifth Avenue in Manhattan, one of America’s premier shopping districts, on February 15, 2023. Consumer spending last month was unexpectedly strong. That’s good for the economy, but not so good for the inflation outlook.
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People walk down Fifth Avenue in Manhattan, one of America’s premier shopping districts, on February 15, 2023. Consumer spending last month was unexpectedly strong. That’s good for the economy, but not so good for the inflation outlook.
Spencer Pratt/Getty Images
Something unexpected is happening in the US economy.
Inflation remains high, but many Americans continued to splurge last month by eating out at restaurants and shopping for cars.
Such additional spending is welcome news for an economy that normally relies heavily on consumer dollars.
But there are pitfalls. All this spending threatens to put more upward pressure on inflation at a time when the Federal Reserve is aggressively raising interest rates to keep prices down.
That’s why it’s important to measure how long consumer spending lasts.
Lower consumer spending will help keep inflation in check, but it also raises concerns about recession. On the other hand, if spending continues to grow at this pace, the Fed may be forced to raise rates more aggressively to keep prices down.
Here are three things you should know about American spending habits and what they mean for the American economy.
Why Some Americans Still Have Money To Burn
Just when consumers seemed to be running out of gas, shoppers seem to be getting wind again.
Private consumption rose 1.8% in Jan, According to the Department of Commerce On Friday, consumers spent money not only on goods, but also on services such as dining out and going to the movies.
Many people have money in their pockets thanks to job growth and growth. wage increaseThis year, retirees will also be raised. Social Security benefits he increased 8.7% in January, the biggest cost of living increase in 40 years.
Recruiters talk to job seekers at Mega South Florida Job Fair February 23, 2023 at FLA Live Arena in Sunrise, Florida. The employer added more than 500,000 jobs to her in January.
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Recruiters talk to job seekers at Mega South Florida Job Fair February 23, 2023 at FLA Live Arena in Sunrise, Florida. The employer added more than 500,000 jobs to her in January.
Joe Raedle/Getty Images
The extra income will help support consumer spending in the coming months, said Jonathan Silver, who tracks credit card usage by about 100 million people nationwide.
Affinity Solutions CEO Silver said: “I think the spending rate will hold,” he said.
What’s more, in the early months of the pandemic, when spending opportunities were limited and the government was distributing multiple rounds of relief money, many people siphoned off their extra savings. Although declining, Americans still have a lot of extra cash.
Wells Fargo economists write, “We estimate that households still have about 10 months of purchasing power if they continue to deplete excess savings at the same pace as they have in the past six months.” research notes Friday.
Those who postponed travel during the worst of the pandemic are making up for lost time. Vacationers to Las Vegas soared by more than 20% last year.
Las Vegas Convention and Visitors Authority CEO Steve Hill said: “I think it drove a real energy back into the experience. I’m sure there is.”
January figures show both jumps. Spending on goods increased by 2.8% and spending on services increased by 1.3%.
But will all this spending last?
Of course, not everyone has cash. Some families are in trouble. Businesses are also not confident that consumers’ free spending habits will continue.
Spending increased much faster than income in January, and shoppers may be hitting their limits.
Walmart, America’s largest retailer, expects modest sales growth this year. CEO Doug McMillon says shoppers are increasingly focused on basic necessities such as groceries, limiting spending on discretionary items.
“Customers are still spending money,” McMillon told analysts last week. “It’s obviously not clear to us what the second half of the year will look like.”
People shop at a Target store in Los Angeles with a sale sign for coffee pods on February 13, 2023. Inflation has eased since peaking last year, but is still stronger than many economists expected.
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People shop at a Target store in Los Angeles with a sale sign for coffee pods on February 13, 2023. Inflation has eased since peaking last year, but is still stronger than many economists expected.
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Restaurant owner Cameron Mitchell is equally cautious. Mr. Mitchell, who owns dozens of restaurants ranging from high-end steakhouses to casual Mexican restaurants, has noticed that customers seem to be drawn to his cheaper outlets.
He chose to skip the usual spring price increase this year.
“This is just my intuition as an operator,” says Mitchell. “one year ago [people] We knew we had to raise our prices. It was obvious and they accepted it. But consumers are starting to change. I think people want lower inflation and are less tolerant of price increases. ”
And finally, Fed rate hikes could hurt
There is another reason for the cooling of spending.
To curb inflation, the Federal Reserve has tried to slow shoppers’ spending by raising interest rates.
Economist Ian Shepardson believes the Fed’s efforts are paying off. He believes last month’s surprisingly strong spending was a fluke as a result of unusually warm weather.
Shepardson, chief economist at Pantheon Macroeconomics, said: “I’m a little surprised that some people jumped on January’s numbers and declared that they showed some evidence that the economy wasn’t responding to the Fed’s rate hikes. ‘ said. “From the Fed’s perspective, I think the trend is very positive. Economic growth is slowing. Inflation is falling. But these things are never going to happen in a straight line.”
Restaurant owner Cameron Mitchell stands at one of his establishments. Mitchell, who owns dozens of restaurants, said diners seem to be choosing cheaper options.
Courtesy of Chris Casera/Cameron Mitchell Restaurant
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Restaurant owner Cameron Mitchell stands at one of his establishments. Mitchell, who owns dozens of restaurants, said diners seem to be choosing cheaper options.
Courtesy of Chris Casera/Cameron Mitchell Restaurant
At the moment, the economic line is particularly zigzag. Some point to continued growth in spending, like a strong job market. Others point to an impending slowdown, such as an increase in the number of delinquent auto loans.
Some forecasters believe the Fed will hike rates more aggressively after Friday’s report showed that spending remained strong. That outlook has weighed on the stock market. The Dow Jones Industrial Average fell nearly 3% last week.
But restaurant owner Cameron Mitchell is cautiously optimistic. His food expenses began to level off. His restaurant was understaffed. And he plans to open about half a dozen new locations this year.
“There’s a little bit of uncertainty there, but likewise, I think the opportunities we have are really well established,” he says. I can’t imagine it being anything serious.”
