Miami, Florida, Brickell City Center shopping mall with Apple Store, Chanel and escalators.
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With up to 60% of US consumers living paycheck to paycheck, it’s no surprise that spending cuts have begun. Even with a strong job market and wage gains and savings from Covid stimulus, price spikes in core spending categories like groceries, gas and housing are keeping more Americans watching their wallets closely.
A new poll by CNBC and Momentive shows growing concerns about inflation and the risk of a recession, with Americans saying not only have they started buying less, but they will buy less in more categories if inflation continues. But these financial pain points aren’t limited to lower-income consumers. The poll found that Americans with incomes of at least $100,000 say they have cut spending or will soon do so, in numbers not far from the decisions being made by lower-income groups will.
The high-income consumer demographic is key to the economy. Although it only represents a third of consumers, it is responsible for up to three quarters of spending. As Mark Zandi, chief economist at Moody’s, notes, “If high-income consumers are on the move, we won’t see a big impact on raw consumption activity.”
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Low-income households are most at risk, and they are the most likely to make unwelcome compromises to get their money as far as it was just a few months ago, the survey finds. They also suffer significantly from financial anxiety, according to the survey: 57% of Americans with an income of less than $50,000 say they are more stressed than they were a year ago, compared to 45% of Americans with an income of $100,000 US dollars or more. The 68% of high-income consumers who worry that higher prices will force them to reconsider financial decisions is significantly lower than the 82% of Americans with incomes of $50,000 or less who told the survey, but it is still a majority.
More than half of those with household incomes under $50,000 say they have already cut several expenses because of prices, and for those with incomes of $100,000 or more, the cuts are already similar when it comes to food go, take a vacation and go buy a car.
“People on six-figure incomes are almost as concerned about inflation as people on half that income — and they’re just as likely to take steps to mitigate the impact on their lives,” said Laura Wronski, senior manager of research science at Momentive . “Inflation is a problem that gets worse over time, and even high-income individuals will not be isolated from the second- and third-order effects of price increases,” she said.
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Other recent consumer survey data paint a weaker picture.
The University of Michigan Consumer Survey finds that more consumers mention reduced living standards due to rising inflation than at any other time in the survey’s history except during the two worst recessions of the past 50 years: March 1979-April 1981 and May through October 2008. Notably, the consumer confidence gap between low and high income levels always narrows at cyclical lows and is always widest at highs, and the gap is now narrowing, according to survey leader Richard Curtin.
In January, the gap between the lowest and highest income groups in the survey’s sentiment index was 13.2 points. This was erased in March, with top earners’ sentiment actually dipping below bottom earners’ overall sentiment and future expectations. In January, the expectations of higher income groups in particular were 18 percentage points higher.
Right now there is a unique set of issues that could exacerbate this gap-narrowing, Curtin said, including the potential for a Russian invasion of Ukraine to do more damage to the global economy than projected and the fact that the majority of the population has not done so experienced inflation in excess of 10% or mortgage interest rates in excess of 15% as previous generations had.
“Even at lower rates, they can exhibit behaviors associated with more extreme past economic conditions,” Curtin said. “Cautionary motives play a large role in upper-income consumption trends,” he added.
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“The American consumer is in a somber mood,” Zandi said of the CNBC poll data. More than two years since the outbreak of the pandemic, first with millions of lost jobs and high unemployment, now with high inflation and “broken politics, which also weighs heavily on the collective psyche”.
All income groups in the survey have over an 80% chance of saying the economy will enter a recession this year. But there is an important caveat: Actual economic spending actions do not yet suggest this prediction will materialize.
Despite feeling down about her finances and cutbacks, Zandi stressed that consumers are still spending heavily. Jobs are plentiful now, unemployment is low, debt is low, asset prices are high, and there is plenty of excess savings. While people are cutting back, spending less on some things, sentiment has yet to dominate spending motivation to a degree that more than equates to a slowdown in economic growth. “I suspect that as long as the job market remains strong, American consumers will continue to spend regardless of sentiment,” Zandi said.
The latest Conference Board monthly confidence index showed (slightly) elevated current confidence but a lower expectations index for the first time this year, with consumers leading rising prices, including gas.
Lynn Franco, director of economic indicators and surveys at The Conference Board, said there’s still a gap in confidence data between lower- and higher-income consumers, and much of that is due to the inflationary environment, with the affluent feeling less of an impact Factors including gas prices. She said the gap is narrowing in a pre-recession era – but the data isn’t currently pointing to a recession.
What its confidence survey is predicting is a slowdown in growth over the next few quarters, driven by higher prices and more Americans spending less on consumer items as more of their money goes towards meeting basic needs. Low-income consumers will feel the effects the hardest, but there is widespread concern about a significant price hike in the coming months – 6 in 10 consumers polled by the Conference Board believe the war between Russia and Ukraine will drive prices down Soar will increase significantly.
“This is very broad in scope, and combined with rising interest rates, this could make people hesitant to put off big purchases like homes, cars and washing machines,” Franco said. “We will see a slight slowdown in consumer spending over the next few quarters, but we don’t think that will push us into a recession.”
The overall confidence level of Americans earning $125,000 in his survey has fallen again since mid-2021, but Franco described them as still “relatively confident, despite all the volatility we’ve seen. … The signs we’re getting across income groups point more towards a slowdown in consumer spending than a sharp pullback,” she said.
The Conference Board data, similar to other forecasts, is underpinned by the key role of the job market in boosting confidence and offsetting the negative impact of inflation, with Americans saying jobs are “abundant” at an all-time high.
More from CNBC | Momentary consumer survey
Members of the CNBC CFO Council have mentioned “a tale of two cities” among consumers, with higher-income consumers continuing to be strong while lower-income consumers are starting to chew through the stimulus. There will be a new equilibrium point and inflation will not grow as it did last year, but it will remain at higher levels and consumer spending will need to counter this dynamic, which will continue into calendar year 2022, and is expected to be in be felt more strongly in the second half of the year.
Key factors CFOs are watching include the decline in consumer savings rates; how successfully the Fed is using its tools to slow the economy without pushing it into recession, including raising interest rates to cool consumption and investment; and greater supply chain stability.
The supply chain remains in flux with new Covid variants as well as the Russian war against Ukraine affecting energy and food prices. But as pressures across the supply chain ease, inventories will be replenished at a rate that could lead to greater resistance from retailers on pricing as consumers also begin to slow down their spending habits, reducing or phasing out certain categories of purchases to bargain away from them.
The latest Conference Board CEO survey showed that companies are relatively quick to pass on the cost of inflation to consumers, and this pattern is likely to continue in the coming months, with wage increases being a key driver. “What we are seeing and hearing from members is that these tight labor market conditions will continue for several months to come, so we will continue to see wage pressures,” Franco said.
If earnings roll in, the market will be on the lookout for signs of sustained consumer strength given higher prices. Earlier this week, Conagra’s results showed that price increases relative to input costs failed to feed through to the bottom line, but CEO Sean Connolly said on Thursday that “despite our pricing actions to date, consumer demand has remained strong. ”
Conagra plans further price increases.