(Bloomberg) — The key drivers of the U.S. consumer’s remarkable resilience are losing steam at the same time, suggesting that a recent decline in household demand could be more than just a one-off phenomenon.
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Real disposable incomes have increased only modestly over the past year. The savings rate is now at a 16-month low, with households having mostly used up the extra money they had accumulated during the pandemic. Many Americans are increasingly relying on credit cards and other financing sources to finance their expenses.
These factors help explain why real spending – which excludes the impact of inflation – fell in April as consumers spent less on cars, restaurants and recreational activities. As the job market also cools, companies like Best Buy Co. have noticed a shift in recent months as shoppers shift to less expensive brands.
“The slowdown in labor market dynamics will continue to limit income growth and push more families to exercise moderation in their spending amid shrinking savings reserves and a growing debt burden.” , Gregory Daco, EY chief economist, said in a note on Friday. “Taking into account increased price sensitivity, the dynamics of household spending will gradually slow down.”
The drop in consumer spending announced Friday and the government’s recent downward revision of the first quarter gross domestic product estimate provide fairly compelling evidence that the U.S. economy is emerging from the surprisingly strong pace it has been at. it had established in 2023.
The latest data should also reassure officials at the Federal Reserve, where a debate has erupted in recent weeks over whether their key rate – at its highest level in more than 20 years – was holding back the economy as much as they had planned it. would be.
The debate arose from the strength shown by the American consumer over the past two years. While this has helped the U.S. economy repeatedly defy calls for recession, it has intrigued Wall Street economists and Fed officials. Robust labor demand, pandemic-era savings, and sizable wage increases have all contributed to this.
But as inflation proves persistent, forcing the Fed to keep borrowing costs high, the U.S. economy is finally starting to slow. Demand for workers has declined from pandemic peaks, meaning employers are no longer raising wages as quickly. Wages and salaries rose 0.2% in April, the smallest increase in five months, according to the personal consumption expenditures report.
Recent company results indicate that consumers are increasingly favoring basic products over large discretionary items. And higher-income consumers are bargaining down or shopping for deals, which has helped boost sales at Walmart Inc. and discount retailer Dollar General Inc.
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Consumers are making “tough choices with their budgets,” Corie Barry, Best Buy’s chief executive, said during the company’s first-quarter earnings conference call. The executive highlighted changes in the macroeconomic environment since the electronic retailer’s last quarterly report.
“Three months ago, several indicators were showing some favorability, including falling inflation, still-low unemployment, encouraging trends in consumer confidence and the start of a rebound in the housing market,” Barry said . “Since then, inflation has remained high, mortgage rates have been high, and consumer confidence scores have been trending downward. »
A new government employment report, due Friday, will offer more information on the direction of the labor market. Fed policymakers will pay close attention to these numbers as they continue their quest to tame inflation without breaking the economy.
From this perspective, the decline in consumer spending in April likely contributed to the welcome decline in inflation. But it could also raise the question of how long the economy can hold up.
“Fed officials will view today’s report as showing some slowing in consumer spending, indicating diminishing inflationary pressures,” Citigroup Inc. economists Andrew Hollenhorst and Veronica Clark wrote after the report. of the PCE on Friday. “Our view of the U.S. economy is not as optimistic.”
—With help from Jaewon Kang and Leslie Patton.
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