US consumers kept spending last year despite historically high inflation, not only shelling out for necessities but also splurging on restaurants, travel and other experiences impeded by the pandemic.
Economists predicted that spending would decline as the months progressed, as savings declined, prices rose, and the Federal Reserve intensified its efforts to reduce demand. These predictions seemed to have come true by December and November, when data showed that consumers had slowed down during the holiday shopping season.
Then came January.
During a month chock full of suprisingly strong economic data, the Commerce Department's retail sales and consumer spending reports far surpassed expectations. It appeared that consumers weren't just resilient, they were practically resurgent.
Shannon Seery, Vice President and Economist at Wells Fargo's investment and corporate bank, stated that if they have money they've already shown us that they will spend it. "I believe that the only thing that will really cause the consumer to change is a decline in the labor market.
But like most things during these wonky economic times, the apparent January spending jump isn't as simple as it seems.
Seery and others caution that the early 2023 surge may be attributable to seasonality quirks or, even more likely, a temporary recovery to belt-tightening at the tail end of last year.
If anything, they say, strong spending activity is likely on borrowed time as safety nets are fraying and negative external factors are accumulating.
'I think it's more likely that we'll see a return to some weaker data, some softer spending, some softer demand, because it's hard to see that resulting in a full turnaround, given how much savings have already been worn down and credit utilization has climbed up,' said Kayla Bruun, economic analyst at decision intelligence company Morning Consult. 'It's not sustainable to keep spending above their means.'
Hearty consumer spending at a time like this is a double-edged sword, said Ted Rossman, senior industry analyst for Bankrate and CreditCards.com.
Rossman stated that the recession was pushed out by consumers' resilience to spending. This is in some ways a good thing for the economy, as people are spending. However, we are concerned about the household level. Are they going to spend too much? Will this lead to financial problems?
While day-to-day expenses — and the sheer influence of inflation — are driving a lot of these numbers, discretionary spending is also staying steady to some extent, he said.
CNN reported that he said that higher prices were juicing some stats. "There is plenty of demand and the job market is strong. It seems like consumer spending is more robust than many of us expected.
This could have a negative impact on the Fed's game plan. The Fed has issued modest rate increases to evaluate the effects of its earlier string of heavy-handed increases.
"Six months ago, I would say that, yes. If [consumers] keep spending, the Fed will have to go higher, stay there longer and cause a more severe depression," Wells Fargo's Seery stated. "Part of me thinks that this is still possible. But in some ways, this makes it easier for the Fed to do their job if consumers can withstand higher rates and the labor force doesn't decline as much.
She added: 'The Fed might not necessarily have to go higher [than currently projected], but they probably are going to be on hold for longer.'
Wells Fargo's current base case scenario calls for the Fed doling out quarter-point hikes at both its March and May meetings and then pausing.
It's also important to note, Seery said, that the full brunt of the Fed's moves in 2022 have yet to be felt.
'The tightest point of Fed policy is probably going to be four to six months after the last hike, which is is conjunction with our overall recession calls,' Seery and fellow Wells Fargo economist Tim Quinlan wrote in a February 24 note.
The pandemic effect
Cait Lamberton, professor of Marketing at the University of Pennsylvania's Wharton School, stated that it appears that the pandemic has had an impact on consumers' behavior.
There's more 'transformational spending' to reflect new chapters people believe they're starting in addition to a greater focus on making up for lost time and experiences due to the pandemic, she said.
'I think there's a tendency to say that consumers are just wasting money and complaining about prices, and I think that's not the best way to think about it,' she said. 'I think that during the hardest portions of the pandemic, people realized what was important to them.'
She added: 'It's not a bad idea to spend more on things that matter; it's not a good idea to spend money on things that don't matter.'
To some extent, consumers already are exhibiting some recessionary shopping behaviors at the grocery store, said Carman Allison, vice president of thought leadership for North America at consumer research firm NielsenIQ.
Retailers are anticipating a challenging year ahead. Walmart released a more cautious outlook on the economy last week, anticipating that its core customers, those with lower incomes, will be further squeezed by inflation. HD warned that flat sales are possible for 2023, as consumers shift spending away from goods and services.
CNBC's John Rainey, Walmart's chief financial officer, stated that the consumer is still under pressure. "If you look at economic indicators, balances are getting thinner and savings rates have declined relative to prior periods. We are therefore cautious about the remainder of the year.
Because of the persistently high inflation for food items and consumer packaged goods, Americans are spending more and consuming less, Allison said. In the fourth quarter of 2022, 32% of shoppers surveyed said they were buying less or restricting purchases to essentials, Allison said.
'Right now, we have a consumer that is more loyal to their wallet than they are to brands and retailers,' he said.
Potential shoes that can drop
The foundation is showing cracks. The US household debt reached a record $16.9 trillion in the last quarter. Credit card balances rose nearly 6.6%, the highest quarterly growth rate since 1999 when the Federal Reserve Bank of New York began tracking this data.
Bankrate has released new survey data that shows consumers are losing money. 49% of those surveyed stated they had less emergency savings than a year ago, or none at all.
A record 36% of respondents also stated that their credit card debt was more important than emergency savings, a new high for 12 years.
Mark Hamrick, Bankrate senior economic analyst, stated that in a perfect world there would be more emergency savings spread across more people. "But we don’t live in that perfect universe.
There is growing concern that these situations could rapidly worsen if pandemic-era relief programs are terminated and payments moratoria end.
New York Fed researchers found that the end of federal student loan payment forgiveness could cause delinquencies to rise as well as spillover to auto and credit cards.
Bankrate's surveys have shown that the cost of credit card interest has risen to its highest level since then. However, Hamrick stated that savings yields are at historic highs.
However, 'It's not whether unexpected events are going to occur, it's only what they look like when they do rear their ugly heads,' he cautioned.