Why are American consumers spending so much?

Americans have been Pessimistic About the economy many years. Oddly, that seems to have little effect on their willingness to open their wallets.

Retail sales have soared during the pandemic as people working from home clicked “buy full” on everything from Peloton to sourdough starters. In 2020, E-commerce sales increased by 43%. Stimulus checks gave Americans new savings and extra money to spend. Supply chains can no longer keep up with demand.

It was all supposed to come crashing down someday. For more than a year, economists havedeath of the consumer” and a resulting recession, but neither has materialized. Inflation was expected to soar and consumers were expected to retreat. Reaching a peak of 9.1% in June 2022 And it remains stubbornly above the Federal Reserve’s target interest rate of 2%.

Instead, Americans continued to buy more products, even after accounting for price increases. Beyond increasing disposable income.their spending was useful Driving economic growth in the United States It reached a high level in 2023 and remained high during the first few months of this year. Personal consumption in March was 0.8% increaseexceeded financial analysts’ expectations.

Americans’ binge-buying spree finally seems to be coming to an end: Retail spending remained the same Month-on-month growth in April was lower than analysts expected.

However, these figures do not include spending on services (such as health care, transportation and insurance), which have increased significantly this year.and both Preston CaldwellSenior U.S. Economist at Morningstar, Inc. scott hoytEconomists at Moody’s Analytics said those numbers could easily rebound next month, even though they expected spending to cool by the end of the year.

“Ultimately, we expect to see a consumer slowdown this year,” Caldwell said. “It’s too early to say that it’s already underway right now.”

To be sure, the pressure of high interest rates will inevitably lead to a reduction in spending at some point, and the Fed is not expected to cut rates until later this year. There is a possibility that there will be no such thing at all in 2024.. So why is consumption so resilient despite all the despair and depression among consumers?

Who is driving the high spending?

Two things are true at the same time. People feel very negative about the economy, but that doesn’t stop them from spending. In May, the University of Michigan reported its lowest consumer sentiment index in six months, at 67.4 out of 100, as part of a survey. long-term investigation.

It’s up from this time last year, but still way below. Pre-pandemic consumer sentiment measurements, which lasted from the late 1980s to the 1990s. The University of Michigan report says sentiment trends extend beyond demographics, with consumers “expressing concerns that inflation, unemployment, and interest rates will all move in an unfavorable direction in the year ahead. “I did,” it says.

It’s hard to reconcile that with the high spending numbers. But the bottom line is that the wealthy now feel richer, and they account for a larger share of overall spending. The middle class also feels a little better off and probably has enough savings to spend. They may not yet feel the pressure of high interest rates and inflation as much as those who rent and invest less. (However, that is subject to change.)

High-income consumers – households in the top 20% of incomes Earn at least $244,025 Pre-tax as of 2022 — Economic headwinds have largely eased and there is plenty of cash to spend.

Due to the pandemic, the average percentage of Americans’ income saved is Highest ever 32% in April 2020 after many households received stimulus payments. This has helped drive spending, but it is different from before. other high income countries Where consumers are proving more frugal, Americans are depleting their savings.

“Extra savings [are] It’s still moving slowly through the system. “Depending on how you estimate excess savings, excess savings will be depleted by mid-2024 or no later than mid-2025,” Caldwell said.

Additionally, many high-income consumers have locked in low interest rates on their mortgages before the Federal Reserve begins raising rates in March 2022, and have seen their home values ​​continue to rise despite this. I have to.Average home price in the US increased From $287,000 in 2019 to $450,000 in 2024. This is partly due to continued inventory shortages. High interest rates are discouraging prospective sellers from buying new property, as mortgage payments will be higher.

High-income consumers have also seen their investment portfolios expand over the past year. The stock market has repeatedly tested new highs in recent months. Latest record set on Thursday Following new data showing inflation is slowing. And wealthy older Americans who allocate much of their portfolio to government bonds… benefit from rising interest rates.

“It gives consumers an incentive to spend from their newfound wealth,” Hoyt said. “And because this group of consumers still has surplus savings from the pandemic, they have easy access to relatively liquid funds.”

The question is how long the stock market can maintain this rise. Some analysts believe the stock is currently overvalued and in the midst of a correction, which may cause some to finally close their wallets.

“The stock is definitely starting to move further into overvalued territory,” Caldwell said. “So it probably won’t be a tailwind.” [for spending] Over next year. ”

At the same time, the factors currently driving spending at the highest income levels are not universal. Not all consumers can afford to spend more.

Even though inflation has fallen significantly from its peak in 2022, low-income Americans Struggling with rising prices.Consumers commonly say they budget Daily essentials details Fresh food, baby products, etc.

For those living paycheck to paycheck, pandemic savings (if they even existed) may be long gone.

Low- and moderate-income consumers are also finding themselves increasingly burdened with credit card debt due to high interest rates and struggling to repay it. Main contributors To general economic pessimism.

Credit card debt levels declined during the pandemic, but are now returning to pre-pandemic levels, with average balances per consumer increasing. Last year it rose 8.5% to $6,218.. more than half People who earn less than $25,000 a year carry balances on their credit cards.

Their only consolation is that the job market remains strong, meaning they may be able to count on new paychecks, but even that may not last. Analysts including Mr. Caldwell expect the unemployment rate to rise from 3.8% to 3.9% in 2024 and wage growth to slow.

But at the end of the day, Hoyt said, low-income consumers “don’t make up a huge portion of total spending.” “A disproportionate share of spending is at the top of the income distribution.”