One reason inflation has held its grip on the US economy that American consumers continue to spend, so that they can live undeterred by the increase in prices, which has actually helped to fuel them. But how long will all the spending last?
The combined impact of federal relief during the early months of the pandemic, the ensuing stock market and record-low unemployment left consumers flush with cash, prompting many to splurge on everything from homes to new and used vehicles and vacations. But all that spending helped create a supply squeeze that led to a lot of price increases that now bedevil shoppers.
To counteract the unprecedented demand for goods and services, the Federal Reserve has raising its key interest rate to levels not seen in years. That caused the stock market to tank, home price growth to stop, and interest rates on things like cars and credit cards to rise.
As a result, economists are increasingly predicting a significant economic downturn.
“With the deteriorating global economy likely to weigh on exports soon and drag on domestic demand from interest rate hikes, we think it’s only a matter of time before the economy starts to contract,” senior Andrew Hunter said. US economist at Capital Economics research and consulting group, in a note to clients on Wednesday.
But exactly when a recession will hit remains a matter of debate — and could still be a way out, given a mix of indicators that paint a complex picture of the health of the U.S. economy. That has given some consumers to spend freely this holiday shopping season. And it could be one last hurray for American spending triumphs before a bona fide economic slowdown sets in in the coming year.
Some signs of slowing down
There have been some signs of an explosion in US purchases in recent months. consumer spending increased 0.6% in September, more than 0.4% expected. Casino operator Caesars Entertainment told investors this week that October was “the strongest month in Las Vegas history” for the company.
That is perhaps the clearest sign of consumer enthusiasm amid the current economic environment.
Several companies reported record revenue in the latest quarter including Apple, Airbnb, Ohio entertainment venue Cedar Point, General Motors and Samsung.
These strong earnings have helped boost the job market. At a news conference following the announcement of the Federal Reserve’s latest rate hike, Fed Chairman Jerome Powell said demand for workers remains strong, a sign that many businesses are continuing to hire.
“We’re still looking for signs that at first a gradual softening is happening and maybe it’s there, but it’s not clear to me because wages aren’t going down, they’re going sideways at a high level,” Powell said.
In a recent report titled “Holiday Sales 2022: The Last Hurrah,” Wells Fargo economists forecast another healthy holiday sales season, if a bit quieter than the past two years.
“Despite the pandemic, holiday sales have grown at a historic pace for the 2020 and 2021 holiday seasons,” the economist wrote. “This year, with pandemic fears now largely in the rearview mirror, consumers are looking forward to a more typical holiday shopping season.”
But simple math dictates that consumers will eventually run out of ways to spend, they write. Notably, cash reserves built up by households over the previous two years have declined. It happens at the same time that people put money into savings, and that wages, in many cases, do not keep up with inflation.
“The sand has run out of the hourglass,” Wells Fargo senior economist Tim Quinlan said in a follow-up interview with NBC News.
The likely decline will be moderate, he said, more akin to the bursting of the dot-com bubble in 2000 than the great financial crisis of 2008, or the dramatic pandemic decline of the spring of 2020.
“Consumers will say, ‘This is not sustainable. I can’t eat corn seeds forever and use my savings to finance my lifestyle where I spend more than I make, “said Quinlan.
But consumers will have to hold on this holiday season, experts say. In a survey of nearly 5,000 shoppers, Deloitte found 74% of respondents said they would spend more or the same on vacation as they did last year. That compares to 75% who said the same in 2021.
“It’s going to be a pretty solid season,” said Rodney R. Sides, vice chairman and U.S. retail leader at Deloitte. “We’re not going to set a record, but consumers keep pulling us in.”
Of course, that doesn’t change the facts of the inflationary era: Consumers are losing purchasing power, just because their dollars aren’t up to par last year. But they have proven themselves remarkably resilient, said Kayla Bruun, an economic analyst at Morning Consult.
“But how quickly that fuel tank will run out, we’re not sure,” Bruun said. “Because of the strong labor market, which is the engine that can, things are likely to hold.”