Despite weak confidence readings and inflation at multi-decade highs, consumers’ willingness to spend has been little-fazed in 2022.
For example, personal spending in America has risen every month so far this year, including another 0.7 percent increase in April, according to the latest income and outlays report from the U.S. Bureau of Economic Analysis. Further, this is an inflation-adjusted gain, meaning it is not just rising prices making it look like consumers are spending more each month. Consumption growth also remains broad-based, with solid gains across a variety of goods and services. In fact, large increases in spending were seen in April in categories like recreational services and dining out at restaurants and bars, whereas grocery store spending (dining at home) was one of only two categories to post a decline in real spending in April, not the behavior one would expect to see if the weak consumer sentiment readings were taken at face value.
The bottom line is consumer spending is not slowing as most economists had expected. How is this possible given the softer confidence reports and historic levels of inflation? In the prior blog post, one explanation we suggested was that although consumer price inflation has largely outstripped average hourly earnings, a popular measure of U.S. wage growth, recently, “aggregate” earnings, which factor in growth in both hourly wages and hours worked, are outpacing inflation. Put simply, yes wages on average may not be keeping pace with inflation but this is offset by people working more hours each week. Another factor to consider is that the pandemic-induced recession was not a balance sheet recession and in many ways quite the opposite. Indeed, unprecedented fiscal support and rapidly rising asset values (stocks and real estate) played a big role in bolstering the balance sheets of many U.S. households, in turn generating ample excess savings and lessening the need to deleverage.
As a result consumers in the face of rising prices have been better able (compared to prior periods of elevated inflation) to rely on saving less of their monthly income, spending more of their accumulated savings, and tapping sources of credit. Some combination of the three has likely been going on this year to help explain the staying power of the U.S. consumer. However, none of these forms of purchasing power are sustainable in the long run and a larger slowdown in spending is almost unavoidable now because even if inflation suddenly went to zero, the price increases that already occurred would still mean the costs of goods and services are not going to return to prior levels without outright deflation. Despite this eventuality, though, households still have enough “dry powder” left that sustained declines in outlays are unlikely to occur any time soon.
What To Watch This Week
- Nothing significant scheduled
- FOMC Meeting Begins
- NFIB Small Business Optimism Index 6:00 AM ET
- PPI-Final Demand 8:30 AM ET
- 3-Yr Note Settlement
- 10-Yr Note Settlement
- 30-Yr Bond Settlement
- MBA Mortgage Applications 7:00 AM ET
- Retail Sales 8:30 AM ET
- Empire State Manufacturing Index 8:30 AM ET
- Import and Export Prices 8:30 AM ET
- Business Inventories 10:00 AM ET
- Housing Market Index 10:00 AM ET
- Atlanta Fed Business Inflation Expectations 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- FOMC Announcement 2:00 PM ET
- Fed Chair Press Conference 2:30 PM ET
- Housing Starts and Permits 8:30 AM ET
- Jobless Claims 8:30 AM ET
- Philadelphia Fed Manufacturing Index 8:30 AM ET
- EIA Natural Gas Report 10:30 AM ET
- 5-Yr TIPS Announcement 11:00 AM ET
- 20-Yr Bond Announcement 11:00 AM ET
- Fed Balance Sheet 4:30 PM ET
- Quadruple Witching
- Industrial Production 9:15 AM ET
- Leading Indicators 10:00 AM ET
- Baker Hughes Rig Count 1:00 PM ET