WASHINGTON (AP) — With prices across the economy — from food, gas and rent to cars, airfare and hotel rooms — soaring at the fastest pace in decades, you might think Americans would step on Expenditure on the brakes.
not too far. Consumers as a group have shown remarkable resilience, not only maintaining spending but increasing spending even after adjusting for inflation. Retail sales outpaced inflation for the fourth straight month in April, the government said. It’s a reassuring sign that consumers — the main driver of the U.S. economy — are still providing important support and helping to ease fears that a recession may be looming.
At the same time, however, there are signs that some people, especially those in lower-income households, are starting to cut back on spending, switching to lower-priced goods or alternatives, or not buying at all when inflation reduces their disposable income some merchandise.
Last week, for example, Walmart, which caters to price-conscious consumers, reported that more of them prefer low-cost store brands of lunch meat than higher-priced national brands and buy half a gallon of milk instead of whole gallons of milk. Likewise, Kohl’s, a mid-priced department store, said customers were spending less per visit.
All of this highlights a question looming over the economy: How long can consumers as a group continue to spend at healthy levels despite inflationary pressures approaching 40-year highs—even if they bite the bullet? The answer will be the key to whether the U.S. can avoid a recession as the Fed sharply raises borrowing rates.
By most measures, consumer spending has fallen from last year’s blowout, boosted by stimulus checks and other government aid after a brutal pandemic recession. This year, Michelle Meyer, chief U.S. economist at the Mastercard Institute for Economic Research, noted that steadily soaring prices have dimmed the economic outlook for Americans.
Even so, Meyer said, there are some reasons for optimism.
“There are still many reasons to believe in consumer resilience,” she said, pointing to a strong U.S. job market and the steady pay rises that many are getting. “There’s a certain level of frustration as they navigate the environment we’re in. But they’re still spending money.”
Come to think of it, even though consumer confidence, as measured by the University of Michigan, has fallen by nearly 30% over the past year, Americans have spent more than inflation over that time. Economists in Michigan noted a “historic disconnect” between sentiment and actual consumer behavior.
Some economists have warned that steady consumer spending may not last in the face of an aggressive credit crunch from the Federal Reserve. If consumer spending does remain strong, the Fed may eventually have to raise interest rates further to cool the economy and slow inflation. Earlier this month, the Fed raised its benchmark interest rate by 0.5 percentage points in an effort to tame inflation and signaled further sharp hikes. Some fear the economy could slip into recession next year.
Still, several trends are driving Americans’ spending, including rising wages, savings built up during the pandemic and a rebound in credit card usage. Economists say those savings and continued wage growth are likely to drive healthy spending throughout the year.
Consumers have been shifting the bulk of their spending away from appliances, electronics and sports equipment—many splurges early in the pandemic while sheltering at home—to travel, entertainment and other services. The intensity of this shift caught many retailers off guard and led to some negative earnings reports.
Target CEO Brian Cornell said the chain “didn’t expect a huge shift” from TVs, appliances and patio furniture to luggage, restaurant gift cards and other items reflecting the growing number of Americans. The more eager to leave the home and consume items.
Southwest Airlines said a surge in demand for air travel will keep it profitable this year. Although average fares rose 32% in the first quarter from a year earlier, the airline said it saw no signs of reduced demand.
For many, the opportunity to travel after two years of restrictions outweighed the financial pressures of higher prices.
Mike and Martha Dissling, who live in San Jose, flew to Washington, D.C., last week to visit their daughter Sarah, a graduate student at Georgetown University.
“She’s been at the school for two years and we haven’t been there because of COVID,” Martha Disling said. “Your priorities have changed.”
To save on gas, Mike Dissling said they drive a Toyota Prius more than their SUV, but otherwise haven’t made significant changes to their spending habits.
However, soaring gas and food prices have caused other consumers to start pulling back. According to the AAA, the national average cost of a gallon of gasoline has jumped to $4.59, a painful increase of more than 50% from a year earlier.
Walmart has said that its shoppers visit its gas stations more often, but less often each time they fill up. Kohl’s reported last week that payment rates for its store cards fell after customers made large payments. Higher credit card debt levels increase the risk of delinquency.
Millbury, Mass.-based musician Dan Gabel has cut back on his entertainment spending as costs soared far beyond his income. Gabel, a big-band leader and trombonist, faced not only soaring gas prices, but many of the items he needed for his job — from dry band uniforms to lubricants for maintaining instruments to printing sheet music paper and ink costs.
Gabel, 33, and his partner, an opera singer, ditched HBO and Netflix to save money. While the musical gigs have been steady, Gabel now rides the train if he can, rather than driving when he’s out of town for gigs.
“We felt the crunch,” Gabel said. “All these little things add up.”
Across the country, though, the overall elasticity of consumer spending points to a trend that could perpetuate inflation: While people hate higher prices, they typically keep paying if their wages are also rising.
“Inflation doesn’t cure itself,” said Laura Wildkamp, a professor of finance at Columbia University. “If commodity prices go up along with wages, that doesn’t necessarily reduce demand.”
Across the economy, median wages rose 6% in April from a year earlier, according to the Atlanta Federal Reserve. This was the largest increase since 1990, albeit below the 8.3% inflation rate.
Surprisingly, though, a large percentage of workers have seen pay rises outpacing inflation: About 45% of workers were paid in March compared to a year earlier, according to research by Indeed Hiring Lab.
Indeed economists Nick Bunker and AnnElizabeth Konkel called the number “remarkable” given the level of inflation. They said it showed how many employers were desperate to find and keep workers with an unemployment rate of just 3.6% and posted job openings that were near record highs.
Many other consumers have had to dip into their savings to keep spending. After hitting a record high of 16.6% in 2020 (from 12.7% in 1948 and 2021), the national savings rate has fallen to around 6%, below pre-pandemic levels.
Household debt rose 8.2% in the first three months of the year compared with the same period last year as more Americans turned to credit cards. This was the largest increase since the economy entered recession in early 2008.
Still, economists say overall debt has yet to reach questionable levels. They estimate that households still have about $2 trillion in savings based on pre-pandemic trends.
Capital Economics economist Paul Ashworth pointed out that household debt is equivalent to 86% of disposable income, well below the peak of 116% in 2008.
“Never bet against the American consumer,” Ashworth said.
D’Innocenzio reported from New York. Associated Press writer Steve LeBron in Boston contributed to this report.