Consumer spending growth shows signs of slowing
Consumer spending has been a bright spot in the US economy so far, even as inflation hits 40-year highs. Although Americans say they have lost confidence in the economy – measures of consumer sentiment have plunged to record lows – they have so far continued to pay for goods and services. But economists say there are signs that are beginning to change, as higher interest rates and a slowing savings rate weigh on family budgets.
“The good news is that we still have savings, but the bad news is that inflation is digging a hole in consumers’ pockets,” said Diane Swonk, chief economist at Grant Thornton. “It’s a tough time for consumers, and we’re starting to see inflation eat away at some forms of spending.”
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Policymakers and economists are watching closely for indications that consumer spending — which accounts for more than two-thirds of the U.S. economy — could run out of steam. Some of this slowdown is deliberate, as the Federal Reserve takes action to cool the economy by aggressively raising interest rates. But there are also fears that a larger decline in consumption could tip the economy into recession.
“We expect to see a slowdown in consumer spending growth as we transition to steady and stable growth,” a senior White House official said during a Wednesday afternoon press briefing. But, the official added, “we have seen relatively little evidence of this to date.”
This year, the US economy contracted unexpectedly in the first three months. On Wednesday, the BEA said the contraction was even deeper than expected: It revised its gross domestic product down 0.1% to an annualized rate of 1.6% after factoring in slower-than-expected growth. expected consumer spending in the first quarter.
Americans are starting to withdraw from travel and restaurants
There has also been a marked shift in where Americans are spending their money. In recent months, they have stopped buying as many used cars and appliances and instead started investing more in services such as restaurants, entertainment and travel. Indeed, Americans spent nearly $44 billion less on goods in May, but $76 billion more on services like housing, utilities, international travel and hospital care.
But there are also signs that more and more families are starting to rethink some of these expenses. U.S. flight bookings fell 2.3% in May from the previous month, according to data from Adobe Analytics. And both high- and low-income Americans have started to pull back, particularly in services, over the past four to six weeks, according to an analysis of credit card data by Barclays.
“Consumers are still spending, but we’re also seeing a shift where they’re saying, ‘We’re going to postpone our vacation’ or ‘Maybe I don’t need to buy a new washing machine just yet.'” said Quincy Krosby, strategist for LPL Financial “They’re rethinking their consumption levels, and that’s because of rising prices for gas, accommodation and food.”
Rapidly rising prices have become a defining challenge for the Biden administration. The Federal Reserve’s favorite measure of inflation, the personal consumption expenditure price index, remains near four-decade highs. A separate inflation benchmark, the widely used consumer price index, showed prices rose 8.6% in May from a year earlier.
The inflation benchmark PCE analyzes changes in the prices of everyday consumer goods, but pays less attention to gasoline prices and housing costs than the CPI. Both inflation benchmarks show that daily costs are rising in a way that is leading many Americans to cut back on certain types of expenses.
Consumer confidence fell to its lowest level on record in June, according to a closely watched University of Michigan survey, with nearly half of Americans saying inflation has eroded their standard of living.