Consumers defy augmentation to prop up the economy. How immense? | bizness magazine

CHRISTOPHER RUGABER and ANNE D’INNOCENTIO, AP Business Correspondents

WASHINGTON (AP) — With prices across the economy — from food, gasoline and rentals to cars, air tickets and hotel rooms — rising at the fastest rate in decades, you’d think Americans would put their spending on hold.

Not so far. Consumers in general are showing amazing resilience, not only maintaining their spending but increasing it even after adjusting for inflation. In April, the government said retail sales outperformed inflation for the fourth month in a row. It was a reassuring sign that consumers, the main drivers of the US economy, continue to provide vital support and help allay fears of an impending recession.

However, at the same time, there are signs that some people, especially those in low-income households, are starting to cut back on spending by switching to cheaper or alternative products, or avoiding some purchases altogether as inflation cuts their disposable income.

Last week, for example, Walmart, which caters to price-conscious consumers, reported that more of them are choosing lower-priced lunch meat brands over more expensive national brands and buying half-gallon milk cartons rather than full gallons. Similarly, Kohl’s, a mid-range department store, has claimed that its customers spend less money each time they visit.

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All of this has highlighted the question looming over the economy: How long will consumers as a whole continue to spend at healthy levels—even if through gritted teeth—despite the pressure they are under from inflation close to 40-year highs? The answer will be key to whether the country can avoid a recession as the Federal Reserve raises borrowing rates sharply.

By most measures, consumers have reduced spending compared to last year’s spending spike, driven by stimulus checks and other government bailouts in the wake of the pandemic’s brutal recession. This year, as Michelle Meyer, chief US economist at the MasterCard Economic Institute, noted, steadily rising prices have hurt Americans’ outlook for the economy.

Still, according to Meyer, there are grounds for optimism.

“There are still plenty of reasons to believe in consumer resilience,” she said, pointing to America’s robust job market and the solid pay raises many people are receiving. back in business. But they are still spending.”

Consider that even though consumer sentiment, as measured by the University of Michigan, has fallen nearly 30% over the past year, American spending has outperformed inflation in the meantime. Economists from Michigan note that there is a “historical discrepancy” between sentiment and actual consumer behavior.

Some economists warn that robust consumer spending is unlikely to last amid the Fed’s aggressive credit tightening. And if consumer spending remains high, the Fed may end up having to raise rates even more to cool the economy and slow inflation. Earlier this month, in a bid to tamp down inflation, the Fed raised its benchmark rate by half a percentage point and signaled more large rate hikes to come. Some fear the economy could slide into recession next year.

However, several trends are impacting Americans’ spending, including rising wages, savings built up during the pandemic, and a resurgence in credit card use. Those savings and continued wage growth could help make spending smarter this year, economists say.

Consumers are shifting much of their spending away from home appliances, electronics and exercise equipment — the types of items many spent money on at the start of the pandemic while sitting at home — to travel, entertainment and other services. The intensity of this shift caught many retailers by surprise and contributed to some negative earnings reports.

Brian Cornell, CEO of Target, said the chain “didn’t expect a dramatic shift” in spending from TVs, appliances and garden furniture to luggage, restaurant gift cards and other items that reflect Americans’ increased desire to get out of the house and spend money. .

Southwest Airlines said growing demand for air travel will keep it profitable this year. Although average fares jumped 32% in the first quarter compared to last year, the carrier said it saw no signs of demand slowing down.

For many people, the ability to travel after two years of restrictions outweighs the financial hardship due to higher prices.

Mike and Marsha Dyslin, who live in San Jose, flew to Washington, DC last week to visit their daughter Sarah, a graduate student at Georgetown University.

“She’s been here at school for two years and we haven’t been visiting all that time because of COVID,” Marsha Dyslin said. “Your priorities are changing.”

To save on gas, Mike Dyslin said they drive their Toyota Prius more than their SUV, but otherwise haven’t made major changes to their spending habits.

However, rising gas and food prices have forced other consumers to start backing down. The national average cost of a gallon of gasoline jumped to $4.59, up 50% from a year earlier, according to AAA.

Walmart said shoppers were visiting its gas stations more often, but filling up less every time. And Kohl’s last week reported a decline in its stores’ card payment levels after a year of significant customer payments. Higher levels of card debt increase the risk of increasing delinquencies.

Dan Gable, a musician from Millbury, Massachusetts, has cut his entertainment spending as expenses have risen far above what he earns. Gable, a big band leader and trombonist, is facing skyrocketing prices not only for gas, but for many items he needs to operate, from cleaning his band’s uniforms to lubricants for instrument maintenance and the cost of paper and ink for printing sheet music.

To save money, Gable, 33, and his partner, an opera singer, have ditched HBO and Netflix. While music gigs have been steady, Gable now takes the train if he can, rather than driving when he performs out of town.

“We feel a crunch,” Gable said. “All these little things add up.”

At the national level, however, the general resilience of consumer spending illustrates a trend that could perpetuate inflation: while people hate higher prices, they often continue to pay them even as their wages also rise.

“Inflation by itself is not a cure,” said Laura Veldkamp, ​​professor of finance at Columbia University. “If commodity prices and wages rise at the same time, this does not necessarily reduce demand.”

According to the Federal Reserve Bank of Atlanta, the average wage in the economy jumped 6% in April compared to last year. This was the largest increase since 1990, although it was below the 8.3% inflation rate.

However, a surprisingly large proportion of workers receive wage increases that exceed inflation: according to research conducted by the Indeed Hiring Lab, about 45% did so in March compared to last year.

Nick Bunker and Ann-Elizabeth Konkel, economists at Indeed, called it “remarkable” that this number was so high given inflation. It shows how desperate many employers are to find and retain workers, they say, with an unemployment rate of just 3.6% and vacancies approaching record highs.

Many other consumers have had to use their savings to keep spending. The national savings rate has fallen to about 6%, below pre-pandemic levels, after hitting 16.6% in 2020, the highest since 1948, and 12.7% in 2021.

And as more Americans turn to credit cards for spending, household debt rose 8.2% in the first three months of this year from a year earlier. It was the largest such increase since early 2008, when the economy entered recession.

However, economists say that the overall debt has not yet reached troubled levels. They estimate that households still have about $2 trillion in savings on top of what they could have based on pre-pandemic trends.

And Paul Ashworth, an economist at Capital Economics, notes that household debt is equal to 86% of disposable income, sharply below a peak of 116% in 2008.

“Never bet against the American consumer,” Ashworth said.

D’Innocentio reported from New York. AP writer Steve Leblanc contributed to this report from Boston.

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