In an economic climate marked by high inflation, rising interest rates, and dwindling fiscal support, American consumers could be pardoned for feeling the pinch. Yet, according to a recent analysis by Bank of America, the reality presents a different picture, with robust spending growth and household deposits standing considerably higher than in 2019. This surprising resilience of consumer spending has left economists perplexed and has even posed challenges for the Federal Reserve, which, in its effort to curb inflation, has pushed consumers to bear the brunt of the highest rate levels in over a decade.
However, the tide may be changing, with early signs of a spending slowdown surfacing. Deloitte forecasts a dip in growth from 2.8% in 2022 to 1.9% this year, a trend that Bank of America attributes to the public’s perception of a deteriorating financial situation over 2022-23. A recent study from the University of Michigan reveals a dichotomy in consumer sentiment – while respondents felt financially better off compared to five years ago, they believed to be worse off than just a year ago. This sentiment is echoed by a study from the Bipartisan Policy Center, which reported that a third of people felt they were doing worse financially than a year ago, compared to a mere quarter who felt they were doing better.
US Consumer Spending: A Tale of Resilience Despite Financial Challenges
As the year 2023 unfolds, US consumers are confronted by a barrage of economic challenges including high inflation, rising interest rates and dwindling fiscal support from the government. Despite these hurdles, an analysis by Bank of America reveals a surprising resilience in consumer spending, backed by relatively high household deposits compared to 2019.
Spending Resilience Amid Economic Headwinds
The resilience of consumer spending has caught economists off guard and even posed challenges to the Federal Reserve, which has been striving to curtail inflation. The bank’s analysis suggests that consumers have endured the highest rate levels in over a decade, pushing them to a "point of pain". Nevertheless, signs of a spending slowdown are on the horizon, with predictions from Deloitte forecasting a drop in growth from 2.8% in 2022 to 1.9% in 2023.
Perception and Reality: The Dual Sides of Consumer Finance
Interestingly, the public’s perception of their financial situation appears to have worsened during 2022-23, according to a study by the University of Michigan. The study asked consumers to evaluate their financial well-being by comparing their current situation to both the prior year and five years ago. While consumers felt they were better off when comparing their finances in 2023 to 2018, they expressed feeling worse off when compared to the previous year. This sentiment mirrors findings from a Bipartisan Policy Center study, which reported a third of people felt they were doing worse financially than a year ago.
The Inflation and Interest Rate Impact
High inflation and rising interest rates are key factors behind the perceived financial strain among consumers. Inflation has eroded the spending power of consumers, making them feel that their dollars aren’t stretching as far. Simultaneously, the rise in interest rates has increased borrowing costs for some households.
The Paradox of Savings and Spending
While consumers may feel financially strapped, Bank of America data reveals that consumers have significantly more cash in their checking and savings accounts compared to pre-pandemic levels. In July 2023, the median checking and savings account was 54% higher than the average in 2019. However, savings and deposits have declined since peaking in the first half of 2021, particularly among lower and middle-income groups.
Looking Ahead: The Future of Consumer Spending
Moving forward, Bank of America anticipates that spending from lockdown reserves will decrease into 2024. The exact timeline will be determined by factors such as income, inflation, and consumers’ sentiments about the broader economic outlook.
In conclusion, despite the current financial challenges, US consumers have shown remarkable resilience. However, as inflation and interest rates continue to chip away at their spending power, their outlook remains cautious. The future of consumer spending will likely hinge on how these macroeconomic factors evolve.