WASHINGTON (AP) — With prices across the economy — from groceries, gas and rent to cars, airfares and hotel rooms — rising at the fastest pace in decades, you’d think Americans would focus on spending step on the brake.
Not far away. Consumers as a whole are showing surprising resilience, not only maintaining but increasing their spending even after adjusting for inflation. In April, the government said retail sales outperformed inflation for the fourth straight month. It was a reassuring sign that consumers – the main drivers of the US economy – are still providing vital support and are helping to allay concerns that a recession may be looming.
At the same time, however, there are signs that some people, particularly in low-income households, are starting to cut back, switching to cheaper or alternative items, or skipping some purchases altogether, as inflation squeezes their disposable income.
For example, last week Walmart, which caters to budget-conscious consumers, reported that more of them are preferring cheaper private label lunch meats to pricier national brands and are buying half-gallon milk cartons rather than full-gallon ones. Likewise, Kohl’s, a mid-range department store, said its customers are spending less each time they visit.
All of this has shed light on a question hanging over the economy: how long will consumers as a whole continue to spend at healthy levels despite the pressure they’re feeling from inflation near 40-year highs — even if they with clenched teeth? The answer will be crucial to whether the nation can avoid a recession if the Federal Reserve hikes borrowing rates sharply.
On most measures, consumers have shifted lower from last year’s spending, fueled by stimulus checks and other government aid following the brutal pandemic recession. This year, noted Michelle Meyer, chief US economist at the MasterCard Economics Institute, steadily rising prices have clouded Americans’ prospects for the economy.
Nevertheless, according to Meyer, there is reason for optimism.
“There’s still a lot of reason to believe in consumer resilience,” she said, citing America’s resilient labor market and solid wage increases that many people are receiving. “There is a certain level of frustration as they navigate the environment that we are in. But they still spend money.”
Consider that even though consumer sentiment, as measured by the University of Michigan, plummeted nearly 30% last year, Americans spent more than inflation during that period. Economists in Michigan noted that there has been a “historic disconnect” between sentiment and actual consumer behavior.
Some economists are warning that resilient consumer spending is unlikely to last amid the Fed’s aggressive tightening of credit. And if consumer spending stays strong, the Fed may need to raise rates even more to cool the economy and curb inflation. Earlier this month, the Fed raised interest rates by half a percentage point and announced more large rate hikes in a bid to quell inflation. Some fear the economy could slide into recession next year.
Still, several trends are driving Americans to spend, including rising wages, savings accumulated during the pandemic, and a recovery in credit card use. Those savings and continued wage increases could lead to healthy spending throughout the year, according to economists.
Consumers have shifted much of their spending from gadgets, electronics and exercise equipment — the goods that many spent heavily on while settled at home early in the pandemic — to travel, entertainment and other services. The intensity of this shift has surprised many retailers and contributed to some negative earnings reports.
Target CEO Brian Cornell said the chain “didn’t anticipate a dramatic shift” in spending away from televisions, appliances and patio furniture and towards luggage, restaurant gift cards and other items, reflecting Americans’ increased desire to to leave the house and spend money .
Southwest Airlines has said rising demand for air travel will keep it profitable this year. Although average fares rose 32% year over year in the first quarter, the airline said it hasn’t seen any signs of curbing demand.
For many people, the ability to travel after two years of restrictions outweighs the financial pressure of higher prices.
Mike and Marsha Dyslin, who live in San Jose, flew to Washington, DC last week to visit their daughter Sarah, a graduate student at Georgetown University.
“She’s been out here at school for two years, and we haven’t visited her the whole time because of COVID,” Marsha Dyslin said. “Your priorities change.”
To save on gas, Mike Dyslin said they drove their Toyota Prius more than their SUV, but otherwise didn’t make any major changes to their spending habits.
However, rising gas and food prices have prompted other consumers to back out. The nationwide average cost of a gallon of gasoline has risen to $4.59, up a painful 50% from a year ago, according to the AAA.
Walmart has said its shoppers visit its gas stations more often, but fill up less each time. And Kohl’s last week reported a decline in the payment rate for its loyalty cards after a year in which customers made sizeable payments. Higher card debts increase the risk of increased payment defaults.
Dan Gabel, a musician in Millbury, Massachusetts, has cut his entertainment spending as costs have risen well above what he earns. Gabel, a big band leader and trombonist, faces rising prices, not just for gas but for many items he needs for work – from dry cleaning band uniforms to instrument maintenance lubricants and more to the cost of paper and ink for printing musical scores.
To save money, 33-year-old Gabel and his partner, an opera singer, have shut down HBO and Netflix. Although music concerts have remained constant, Gabel now takes the train when he can instead of driving when performing out of town.
“We feel the crisis,” said Gabel. “It’s all these little things that add up.”
At the national level, however, the overall resilience of consumer spending illustrates a trend that can sustain inflation: although people hate higher prices, they often continue to pay them even as wages rise.
“Inflation doesn’t heal itself,” said Laura Veldkamp, finance professor at Columbia University. “When commodity prices and wages go up together, demand doesn’t necessarily go down.”
Average wages across the economy rose 6% in April from a year earlier, according to the Federal Reserve Bank of Atlanta. That was the sharpest increase since 1990, but was below the inflation rate of 8.3%.
However, a surprisingly large proportion of workers are getting pay increases that outpace inflation: About 45% did so in March compared to a year earlier, according to research from Indeed Hiring Lab.
Nick Bunker and AnnElizabeth Konkel, economists at Indeed, called it “remarkable” that this figure was so high given the level of inflation. It shows, they said, how desperate many employers are to find and retain workers with an unemployment rate of just 3.6%, posting vacancies near record highs.
Many other consumers have had to draw on their savings to keep spending going. The national savings rate has fallen to about 6%, below pre-pandemic levels, after hitting 16.6% in 2020, a high since 1948 and 12.7% in 2021.
And as more Americans turn to credit cards for spending, household debt rose 8.2% year over year in the first three months of this year. It was the largest such increase since early 2008, when the economy entered a recession.
However, economists say overall debt has not yet reached problematic levels. They estimate households still have about $2 trillion in savings, beyond what they would have had based on pre-pandemic trends.
And Paul Ashworth, economist at Capital Economics, notes that household debt represents 86% of disposable income, well below the 2008 peak of 116%.
“Never bet against the US consumer,” Ashworth said.
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D’Innocenzio reported from New York. AP writer Steve LeBlanc contributed to this report from Boston.