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The American consumer, a pillar of economic growth, is starting to fatigue. With affordability at record lows, it's clear that spending patterns are shifting, and these changes could be symptoms of a slowdown. Let’s break down what’s happening and why it matters.
Decline in Disposable Income
One of the main indicators of consumer health is disposable income. Over the past year, real disposable incomes have seen only modest increases, growing by just 2%. It's like getting a small bonus at work— it helps, but it doesn’t change your life.
With the job market cooling off, wage growth has also slowed. April saw the smallest gain in wages and salaries in five months, which isn’t exactly the news we want to hear when we’re trying to grow the economy!
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Itty-Bitty Bonuses: From Bloomberg, real disposable incomes grew by only 2% over the past year, limiting spending power. This restricts consumers' spending power.
Depletion of Savings
Remember the extra cash we all stashed away during the pandemic? Well, it’s disappearing fast. The current savings rate is at a 16-month low, dropping to 3.6%.
This shows that households have largely spent their pandemic savings. This could mean more people are relying on credit cards and other forms of financing to support spending, increasing debt burdens. It’s like running out of fresh food and having to dig into that can of mystery meat from the back of the cupboard... yuck
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Where'd our Stimulus Go? With less money from the pandemic, our savings rate plummeted to 3.6%, the lowest in 16 months, forcing higher reliance on credit
Shifts in Spending Patterns
April’s consumer spending data revealed a decline in real spending, especially on non-essential items like cars (-2%), dining out (-1.2%), and recreational activities (-1.5%).
This shift means consumers are becoming cautious with their wallets. Retailers are feeling it too. Five Below, for instance, mentioned in a CNBC interview, "Consumers are more discerning with their dollars, increasingly buying to need".
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Consumers are Getting Sucker-Punched: April saw a 0.4% drop in real spending, especially on non-essentials like cars (-2%) and dining out (-1.2%).
Also, the US economy has been showing signs of cooling off. The government’s recent downward revision of the GDP estimate for the first quarter, combined with the decline in consumer spending, provides clear evidence of this trend.
It's good that the Federal Reserve is closely watching these trends. With our fed funds rate at its highest level in over 20 years, there’s an ongoing debate about whether it’s restraining the economy as intended. It’s a delicate dance of trying to tame inflation without breaking the economy.
The slowdown in consumer spending isn’t just a blip—it’s a sypmtom of a broader downturn. With disposable incomes stagnating, savings depleting, and consumers becoming more cautious, these signs are becoming more noticeable.