With Holidays Ahead, Can Consumers Keep Carrying the Economy?

Approximately two-thirds of the United States’ gross domestic product (GDP) is fueled by consumer spending, highlighting its significant influence on either propelling or hindering economic growth. Despite the challenges posed by sustained high inflation and increasing interest rates over the past year and a half, American consumers have been the linchpin of a robust economy. The pivotal concern now is whether they will be able to sustain this level of spending into the upcoming holiday season and further, into 2024.

It’s crucial to note that the Federal Reserve is leveraging higher interest rates to temper consumer spending as a strategy to quell inflation. Thus, a moderate deceleration in spending may actually align with economic strategy, whereas a sharp downturn could trigger a recession, requiring a careful balancing act.

Consumer spending trends are typically gauged by the Personal Consumption Expenditures (PCE), a monthly report published by the Bureau of Economic Analysis (BEA). Analysts track the monthly and annual fluctuations in PCE to understand short- and long-term spending dynamics.

Recent data indicated that September’s PCE saw a 0.7% rise from the previous month, signaling robust month-to-month growth, and outstripping the inflation rate when adjusted for real-dollar value. Year-over-year, the PCE increased by 5.9%, substantially higher than the 3.4% annual rise in the PCE price index, the Federal Reserve’s favored inflation metric, which has a target of 2%.

The narrative of current consumer spending can be traced back to the pandemic-induced recession. During this period, economic activities were largely halted, and substantial government stimulus checks were disbursed, leading to a record personal saving rate of 32% in April 2020. However, as the economy reopened and the stimulus ended, coupled with rising inflation, the saving rate dipped significantly, falling to 3.4% in September 2023, which is below the pre-pandemic average.

This low saving rate raises questions about why consumers are prioritizing spending over saving. The answers vary: some consumers, especially those with lower incomes, may be compelled to allocate a larger share of their income to meet basic needs amid soaring prices. Meanwhile, those with more disposable income might be catering to the pent-up demand for goods and services that were inaccessible during the lockdowns. There’s also a sentiment to live in the moment, influenced by the pandemic’s uncertainties, and the prohibitive housing market might be discouraging saving, especially among the younger demographic.

However, it appears that consumers are still spending robustly because they have a substantial safety net of savings. Revised data points to the existence of $1 trillion to $1.8 trillion in “excess savings,” with wealthier households holding approximately half of this amount. This suggests there’s still a sizable fiscal cushion that could propel middle-class spending for a considerable period.

The Federal Reserve Survey of Consumer Finances supports this scenario, revealing that from 2019 to 2022, the average inflation-adjusted median net worth of American families surged by a record 37%, with the under-35 demographic seeing an astounding 143% increase. Although these figures only capture the financial picture up to 2022, they indicate a significant uptick in net worth across all groups.

Looking towards the future, while savings might bolster consumer spending in the near term, it’s ultimately wages that will sustain it. Wages have been rising at a rate of 4.2% over the past year, staying ahead of the PCE inflation rate, yet marking a slowdown from the previous year. This trend of wage growth aligning more closely with inflation is a positive sign for controlling inflation while maintaining consumer spending.

With regards to holiday spending, which typically represents about 20% of annual retail sales, predictions suggest an increase, with consumers expected to spend more on average than the previous year. Although some surveys indicate a dip in consumer confidence, it’s yet to be seen if this will translate into reduced spending. The upcoming holiday spending patterns could be a harbinger of economic and consumer trends for the following year.

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By: 2 Market Media